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Budget Agreement Increases Likelihood of Student Loan, Pell Grant Changes

May 8, 2009

With the April 29 approval of a compromise budget resolution for FY10, the House and Senate gave the nod to legislation that will allow the 12 annual appropriations bills to begin their journey through Congress. The same agreement also directs the House and Senate education committees to approve legislation this fall that, over a five year period, produces $1 billion in savings from the operation of federal student loan programs. This directive opens the door for President Obama’s student aid proposals to be considered in Congress under a process that restricts the use of the filibuster in the Senate.

Earlier this year, as part of his initial budget outline, President Obama proposed a requirement that all federal student loans be made through the Direct Loan program, beginning in academic year 2010–11. Currently, institutions of higher education have a choice of participating in one or both of two programs: the Federal Family Education Loan (FFEL) program and the Direct Loan programs.

Virtually all the anticipated savings from this change would be used to turn the Pell Grant program into an entitlement program, meaning that the total amount of funds to make Pell Grant awards—and the maximum amount of individual grants—would not be subject to the annual appropriations process. Instead, the Pell Grant amount would be established by a formula written into the law, and funding for the Department of Education to manage the program would flow automatically from the U.S. Treasury. Under the formula proposed by the Obama administration, the maximum Pell Grant would increase each year by an amount that would be 1 percent greater than the change in the consumer price index.

Ever since President Clinton first proposed that the federal government provide the capital for the federal student loan program, there has been an ongoing debate about the total costs of the two competing programs. Numerous studies have been conducted since that time, using a variety of assumptions and producing significantly different conclusions. For that and other reasons, consensus has been elusive. However, in a March 2009 report assessing the fiscal impact of President Obama’s budget proposals, the Congressional Budget Office (CBO) estimated that requiring that all student loans be made through the Direct Loan program would save the federal government about $94 billion over the next 10 years. In the same report, the budget office estimated that the administration’s proposed changes to the Pell Grant program would cost $98 billion over the next decade, suggesting that at least some modest changes to the proposal would be needed to comply with Congressional budget rules. CBO estimates are by statute the official scorecard for spending legislation being considered in Congress.

While barring the use of a filibuster in the Senate to block action on the bill, the legislative process devised as part of the budget framework adopted in late April does include another provision that could significantly complicate passage later this year of any changes to the federal student loan and Pell Grant programs. The framework would package into a single bill not only any higher education policy changes, but also health-care reforms. The Obama administration—not to mention every legislator on Capitol Hill —has a wide variety of ideas about how to improve the health-care system in the United States, but changes to this complex system have rarely been easy to legislate. Thus, at least initially, changes to student aid programs will be linked to progress on any health-care reform initiatives that may move through Congress. While the budget framework calls for this legislation to be bundled together, in the absence of a consensus on health-care policy changes, Congress could agree to advance modifications to federal student aid programs on a stand-alone basis. Alternatively, it is possible that the entire initiative could be shelved. NACUBO will regularly update our members on the status of this debate via our Web site (www.nacubo.org) and future electronic newsletters.