Veterans who choose to attend a private institution or graduate program can receive aid up to the cost of in-state tuition charged at the state's most expensive public university.
But veterans attending a private school in California would not have received any tuition benefits because its public colleges and universities charge "fees" instead of "tuition."
Under the new agreement, the VA said it would use the fees charged at public universities to calculate benefits for the state's veterans, who will be able to receive $287 per credit.
"This solution will allow all veterans who want to attend a California school the same benefits as any other veteran across the nation," Secretary of Veterans Affairs Eric K. Shinseki said.
Gov. Arnold Schwarzenegger lauded the agreement.
"Through the combined efforts of my administration and the U.S. Department of Veterans Affairs, California's veterans can now access the full education benefits they have so rightfully earned through their great service to our nation," the governor said in a release. "I want to personally thank U.S. Department of Veterans Affairs Secretary Eric Shinseki for his commitment to resolving this matter and working with us to ensure California's veterans can get the education benefits they deserve."
Iraq and Afghanistan Veterans of America, a nonprofit group, pushed for the change.
In the next decade, $78 billion is expected to be paid out under the new GI Bill, the most comprehensive education benefit offered since World War II.
About 1,100 schools and colleges are offering additional scholarships for veterans that the VA is matching under a Yellow Ribbon program.