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Federal File

Coverage of legislation and regulatory activity that affects higher education

By Liz Clark

Budget Predicament Looms For Pell Grants and Direct Loans

Over the past several years, federal policy makers have been addressing one budget crisis after another. Yet more problems lie ahead. First, a $5.7 billion funding shortfall is estimated for the Pell Grant program in federal fiscal year 2014, which begins Oct. 1, 2013. In addition to the anticipated hole in the Pell budget, the interest rate on federally subsidized student loans is once again scheduled to double, from 3.4 percent to 6.8 percent, on July 1, 2013. Last year, following a major lobbying effort by the White House, Congress struck an agreement to prevent the rates from doubling for one year only, at a cost of $6 billion.

Pell Grant Twists and Turns

In 2008, 6 million Pell recipients received grants totaling $18 billion. The Department of Education (ED) expects the number of Pell recipients to grow by a third-to an estimated 9.6 million in 2012, with grants totaling $36 billion. In addition to the economic downturn and other factors contributing to surging enrollments in recent years, some of the cost increase is attributable to legislative changes that Congress made to the program over the past few years.

In dollar figures, in 2008, the maximum Pell Grant was $4,731. As part of the American Recovery and Reinvestment Act, Congress boosted the amount to $5,350 in 2009 and $5,550 in 2010. The College Cost Reduction and Access Act of 2007 and the Higher Education Opportunity Act of 2008 both expanded the program.

Recently, in efforts to find budgetary savings and contribute to deficit reduction, the federal government eliminated the summer Pell grant, reduced to 12 the number of semesters a student can receive a Pell Grant, made it more difficult for some low-income students to automatically qualify for the maximum Pell Grant, and cut eligibility for the minimum award. However, by FY14, the various budget patches that have kept the Pell Grant program whole are set to expire.

With Obama's budget blueprint for FY14, we are likely to see the administration's suggested solutions for dealing with the Pell shortfall.

Pending legislation contains a provision that would further trim the program by not allowing living expenses to be counted when determining Pell Grant eligibility for students enrolled entirely in online courses. While NACUBO is very concerned about fraud in the Pell Grant program—the impetus for this provision—this legislative proposal appears to go too far and will negatively affect a great number of innocent students.

An Opportunity for Reform?

When President Obama releases his budget blueprint for FY14 during the first week of February, we are likely to see the administration's suggested solutions for dealing with the Pell shortfall and may see changes proposed to the federal subsidized loan program. President Obama's former chief of staff, Rahm Emanuel, was widely quoted in 2008 as saying, "You never want a serious crisis to go to waste."

In the spirit of that philosophy, it is possible that the president may propose major structural changes to either or both the Pell Grant program and student loans. For example, Congress could decide to eliminate the interest subsidy and alter the interest rate structure of the Stafford Loan program.

Last year, in the FY13 budget proposal, the administration proposed tying the distribution of federal campus-based aid—specifically the Supplemental Educational Opportunity Grants and the Federal Work-Study program—to three principles for institutions: setting responsible tuition policy, providing good value to students, and serving low-income students. We are likely to see similar themes in the 2014 budget, and given the recent focus on retention and completion, the Pell shortfall opens an opportunity for proponents to call for tying Pell eligibility to academic progress.

Partisan politics and budget crises have prevented Congress from coming to agreement on spending policies in normal order. While wholesale changes to either program are unlikely to move as a part of the appropriations process, it is entirely possible that some short-term (one- or two-year) solutions are passed by the current Congress. The budget situation, however, sets the tone for the next reauthorization of the Higher Education Act, which expires at the end of 2013.

NACUBO CONTACT Liz Clark, director, congressional relations, 202.861.2553