President Obama Proposes Cuts in Aid Programs to Preserve Pell Grant

President Obama is proposing to cut some student aid programs to maintain the maximum Pell Grant at $5,550 in 2011-12 as part of the FY2012 federal budget request. This comes after the House Republican leadership proposed cutting the maximum Pell Grant by $845 on Friday.

The Pell Grant program has a $20 billion funding shortfall due to large increases in the number of recipients and the average grant amount. The number of Pell Grant recipients increased 45% from 6.1 million in FY2008 to 8.9 million in FY2010. At the same time, the average Pell Grant increased 39% from $2,970 to $4,115. Combined, the total expenditures for the Pell Grant program doubled in just three years.

The program's recent growth is partly because of the economy and partly because the maximum grant was increased to compensate for four years of flat funding during the Bush administration. The number of students filing the Free Application for Federal Student Aid (FAFSA) is up by about a third in the last three years. More of the applicants are qualifying for the Pell Grant. The Health Care and Education Reconciliation Act of 2010 was supposed to provide stable funding for the Pell Grant program, but $20 billion in savings from the switch to 100% Direct Lending was diverted to deficit reduction.

If the funding shortfall is not addressed, the maximum Pell Grant will drop from $5,550 to $3,240 in 2011-12, a decrease of $2,310. To avoid this, the president is proposing to cut other student aid funding, such as year-round Pell Grants and the subsidized interest on student loans to graduate and professional students.

Eliminating year-round Pell Grants. The year-round Pell Grant program allows students in accelerated programs to receive two Pell Grants in a single year. It was enacted by the Higher Education Opportunity Act of 2008 and became available in the 2009-10 academic year. The US Department of Education says that the extra grants "cost 10 times more than anticipated and failed to demonstrate a meaningful impact on students' academic progress." The year-round Pell Grants were also disproportionately used by for-profit colleges, which are more likely to have students studying year-round without a summer break. Eliminating the year-round Pell Grants saves about $8 billion.

Eliminating the subsidized interest benefit on subsidized Stafford loans for graduate and professional students. During the in-school and grace periods the federal government pays the interest on subsidized Stafford loans. The budget proposal will eliminate this benefit on subsidized Stafford loans to graduate and professional students, but retain it for undergraduate students. (The budget proposal also appears to allow undergraduate subsidized Stafford loans to continue to qualify for the subsidized interest benefit during in-school deferments for graduate and professional school.) In effect the subsidized Stafford loans will become unsubsidized Stafford loans. The US Department of Education says that the subsidized interest benefit for graduate students is "poorly targeted" at financial need. Eliminating the subsidized interest benefit will increase the graduate student debt burden, but the income-based repayment plan and public service loan forgiveness program provide a safety net for students who struggle to repay their debt. This change will save about $2 billion.

The elimination of subsidized interest on loans to graduate and professional students will increase the debt at repayment by about a fifth, adding thousands of dollars to their debt burden. Currently, graduate and professional students can borrow up to $8,500 a year in subsidized Stafford loans. (The average subsidized Stafford loan for graduate and professional students was $7,083 in 2007-08. About a third (35.5%) of graduate and professional students received subsidized Stafford loans, a total of 1,227,400 students. Almost half (47.0% or 519,600 students) of graduating graduate and professional students graduate with subsidized Stafford loans, $16,899 on average.) The interest rate on subsidized Stafford loans for graduate and professional students is 6.8%. The average life of a subsidized Stafford loan dollar in an in-school or grace period is 2.9 years for graduate and professional student borrowers. This means that losing the subsidized interest benefit will add $1,676 to each $8,500 loan balance by the time the student enters repayment, a 19.7% increase. This adds more than $3,333 to the debt burden of graduate and professional students who graduate with a typical amount of subsidized Stafford loans. This assumes that the borrower defers repaying the interest by capitalizing it and that the interest is capitalized once, at repayment.

Adding an incentive for "split borrowers" to move their loans to the Direct Loan program. More than 6 million borrowers currently have loans in both the federally-guaranteed student loan program and the direct loan program. The US Department of Education will offer these borrowers an incentive of up to 2% of their loan balance to move their loans into the Direct Loan program. This program will save about $2 billion.

Uncertain Impact on College Degree Attainment

The US Department of Education characterizes these cuts as "making tough choices to put the Pell Grant program on a sustainable fiscal path." Nevertheless, it is difficult to see how President Obama will achieve his goal of America having the "highest proportion of college graduates in the world" without an increase in per-student need-based grants. The President's budget might succeed in preventing the maximum Pell Grant from decreasing, but college tuition will continue to increase. College becomes less affordable when need-based grants fail to keep pace with increases in college costs. Achieving the President's college degree attainment goals will require a substantial increase in student aid funding, not merely maintaining the status quo.

The Obama administration is proposing several programs to increase college graduation rates. These include the College Completion Incentive Grants program ($250 million a year for five years) and the First in the World initiative ($125 million for the first year). The First in the World initiative will help help scale up successful college completion programs. These proposals are a step in the right direction, but they are insufficient to achieve the college degree attainment goals on their own.

Other Budget Proposals

The US Department of Education is proposing to expand the Perkins loan program from $1 billion a year to $8.5 billion a year starting in 2012-13. This is similar to a proposal that passed the US House of Representatives in 2009 but which was later dropped from the Health Care and Education Reconciliation Act of 2010. The new Perkins loans will be unsubsidized with a 6.8% interest rate. In effect, the new Perkins loans will become unsubsidized Stafford loans, but with loan amounts subject to the discretionary control of the college's financial aid administrator. Each college will be allocated a pool of loan money based on the college's success in satisfying access, retention and completion goals. The intention is to provide students with a less expensive alternative to private student loans and credit cards. The proposed increase in Perkins loan funding is almost as much as the total private student loan volume as reported by the College Board's Trends in Student Aid 2010 annual report. As a result, this change may force many private education lenders out of business.

The President is also proposing to simplify the FAFSA by eliminating questions about data elements that are not available from the IRS. A similar proposal was dropped from the Health Care and Education Reconciliation Act of 2010.

The TEACH Grant, which is really a forgivable loan program, will be replaced with the Presidential Teaching Fellows program, a targeted teacher recruitment and retention program. The Presidential Teaching Fellows program will award $10,000 grants to students who commit to teach for three years after graduation.

The budget maintains funding for the SEOG, Federal Work-Study, TRIO and GEAR UP programs, but cuts funding for the Byrd Honors Scholarship and the LEAP program.

Pessimistic Outlook for Student Aid

Given the record budget deficits, it is unlikely that Congress will increase student aid funding by much over the next decade. Instead, there will be greater emphasis on using current funding more effectively. This may include replacing the education tax benefits, such as the Hope Scholarship tax credit, Lifetime Learning tax credit and the Tuition and Fees Deduction with increases in need-based grant funding. The interest benefits on undergraduate subsidized Stafford loans may also be a target for efficiency improvements.

This article originally appeared on Fastweb.