Student Aid Funding at a Crossroad

The intense debate in Congress over spending for the remainder of FY11 will shape student aid funding levels for FY12 as well, even though President Obama’s FY12 budget proposal largely protects federal student aid funding.

The continuing resolution (CR) for the remainder of FY11 passed by the Republican-controlled House— during the same week that the FY12 budget was released by the administration—would have much more drastic impacts on higher education. Under the House CR, the maximum Pell grant would drop to $4,705 (down $845), funding for the strengthening institutions programs targeting minority serving institutions would be drastically reduced or eliminated, the Supplemental Educational Opportunity Grants (SEOG) and Leveraging Educational Assistance Partnerships (LEAP) programs would be eliminated, Americorps would be defunded, and all Congressional earmarks to colleges and universities would be eliminated. The House also approved an amendment that would bar the Department of Education from implementing its controversial “gainful employment” regulations. The Senate has yet to pass its version and the path to compromise for the remainder of FY11 is not clear.

With the current CR expiring on March 4, lawmakers are eyeing a two-week extension that would include immediate reductions in FY11 spending of $4 billion. Included in these cuts are provisions that would terminate the LEAP program, which encourages states to offer their own need-based student aid programs, and $129 million in earmarked funding, distributed through the Fund for the Improvement of Postsecondary Education (FIPSE).

FY12 Budget

The administration’s FY12 budget blueprint sets forth recommendations for appropriations for the following fiscal year. The plan often includes a variety of proposals that would require separate legislative action to implement. In a typical year, Congress uses the President’s budget as a starting point in its deliberations, but the actual budget that results is usually quite different. However, in the current budget landscape, in which the debate has shifted rather dramatically towards spending reductions, the final outcome for student aid (and other programs) spending in FY11 may more closely resemble the ceiling for FY12, rather than the floor.

Key recommendations on federal student aid from the President’s budget proposal are highlighted below.

Pell Grants.  The maximum grant would remain at the current $5,500 even though the program has grown substantially over the last few years, attributable to an increase in eligible students coupled with higher awards.

Pell grants are funded by a mix of discretionary and mandatory funding. Due to prior legislation, the amounts of mandatory funds available for the Pell program will decline from FY11 to FY12 by almost $6 billion.  As a result, additional discretionary funding will be needed to keep the maximum award steady. In order to dedicate these funds to the Pell program without significantly increasing student aid spending, the budget proposes eliminating the year-round Pell benefit which provides a second Pell award in one year to students who accelerate their programs, and making certain changes to the Direct Loan program.

Guaranteed Loans.  The President proposed to eliminate the in-school interest subsidy for Stafford loans for graduate and professional students. This is projected to save $2.2 billion in FY12. The budget also lays out a plan to encourage existing borrowers who have outstanding loans under both the bank-based Federal Family Education Loan (FFEL) program and the Direct Loan program to consolidate their loans under the Direct Loan program by offering them a 2 percent reduction of their loan balances. Savings from simplifying collections activities and reduced subsidies to banks are estimated at $2.1 billion for FY12.

Campus-Based Programs.  The Administration’s proposal to significantly reorganize the Perkins Loan program that was included in the FY10 budget proposal but ultimately dropped in the final version of the Student Aid and Fiscal Responsibility Act (SAFRA) has been resurrected with some additional changes. The budget calls for ED to take over operations of the Perkins Loan program, with loans made and collected directly by ED in the same way that Direct Loans are handled. Institutions would still select recipients, but colleges and universities would no longer maintain revolving loan funds. ED envisions expanding the program to a thousand more institutions, four times more students, and $8.5 billion in new loan volume per year. Interest rates would rise to 6.8 percent and would accrue while students are in school. The administration claims that these changes would save $8.6 billion over ten years. The SEOG and Federal Work-Study programs would be level-funded for FY12.

TEACH Grants. The TEACH Grant program, which provides grants of $4,000 a year to students studying to become teachers who perform qualifying service after graduation, would be eliminated in favor of formula grants to states. The new program would provide grants of up to $10,000 to students for the final year of teacher preparation.

College Completion Incentive Grants. A proposed new program would provide $50 million in grants to states, which would in turn provide payments to schools as a “positive incentive to encourage better outcomes for students.” States would be required to align high school graduation requirements with college expectations, develop articulation agreements and improve transfer of credits, and provide matching funds.

Program Eliminations.  The following programs would be among those eliminated under the President’s budget:

• Leveraging Educational Assistance Partnerships (LEAP)
• Byrd Honors Scholarships
• College Textbook Rental Pilot Initiative
• Legal Assistance Loan Repayment