The University of California has decided to cancel an arrangement with Capella University in which the Minneapolis-based for-profit institution had agreed to pay $500 per student transfer from UC’s Berkeley and Irvine campuses.

The University of California said in a written statement that it was ending the five-year-old relationship, two weeks after it was publicly revealed by The Chronicle, because outsiders were “misconstruing this as somehow being, if not illegal, unethical.”

Under the arrangement, Capella paid Irvine $500 for every continuing-education student referred to it. Capella paid at least $12,000 to Irvine under the program. No money was paid to Berkeley during the three years of that relationship, other than an initial $5,000 set-up fee, a university spokesman, Chris Harrington, said.

Both campuses are ending the arrangement, and officials on the Irvine campus said they would donate their $12,000 in earnings to a scholarship fund for needy students.

The U.S. Education Department, without commenting on the specifics of UC’s relationship with Capella, said it considered such arrangements legal. But critics, including U.S. Rep. Thomas E. Petri, a Wisconsin Republican and former vice chairman of the House of Representatives education committee, said the payments appeared to violate the spirit, if not the letter, of a general federal ban on paying per-student recruitment incentives. —Paul Basken