NAICU Washington Update

President's Student Aid Proposal Gets Complicated

September 02, 2009

When the president's budget proposal first emerged last winter, the basic plan was to require all colleges to convert to direct lending by July 1, 2010.  The $87 billion in savings that resulted would then be used to expand the Pell Grant and Perkins Loans program, and create a state-based Access and Completion Fund.  But congressional jurisdictional battles and cost estimates caused the initial proposal to be modified, and some of those changes raise red flags for private colleges.

The Money Game

The president's initial proposal called for a full Pell Grant entitlement.  However, congressional budget estimates and rules indicated early on that this would be nearly impossible to achieve, since a full entitlement would cost three times more than the savings generated by converting to direct loans.  Adding to the complications was the fact that the Pell Grant program is a favorite of House Education Appropriations Chairman Dave Obey (D-Wis.), who didn't want to give up his role as the Pell Grant program's lead funding advocate.  Obey was concerned that an entitlement might not allow the program to continue receiving the same level of funding increases he had provided during the past decade.

A compromise was struck in early summer.  Congress would continue the Pell Grant base funding through annual appropriations, and the savings from the switch to direct lending would be added on top of that base.  This would guarantee enough additional funding for a permanent annual increase of CPI plus 1 percent to the maximum grant level.

That funding formula, however, only cost $40 billion, leaving $45 billion dollars in additional direct loan conversion money on the table. It didn't take long for the president to come up with ideas on how to spend the left over cash.  And now it's many of those ideas that are causing consternation in the higher education community.

Community Colleges - Money at What Cost?

The most controversial addition to the president's package was money for community colleges. This proposal sets a precedent in higher education policy in which one sector of higher education benefits from a program simply because of its governance structure. To make matters worse, the proposal not only calls for programmatic funds for community colleges, but also for construction money to help fund new buildings.

Still, the community college proposal may prove to be even more problematic to the sector it purports to serve, than to the rest of higher education.  That's because, the bulk of the support for community colleges is tied to a structure of "reform" that parallels No Child Left Behind.  As with NCLB, states are given funding to reform schools - in this case, community colleges - through rigorous state evaluations of school performance. While community college leaders were initially thrilled at the level of recognition and support the president was giving them, many are starting to question the direction that legislation is headed.


The House bill also gives states incentives to get in the college improvement game through the funding stream for programs addressing access, persistence, and completion.  States must develop rigorous postsecondary student unit record data systems to qualify for the grants.  The language is vague on the role of the private colleges in these state efforts.  NAICU is seeking clear and unambiguous language stating that nothing in the act gives states oversight of any aspect of a private college, or authority to compel private colleges to participate in statewide longitudinal data systems.

Perkins Loans

In the meantime, the Perkins Loan program has also gotten murky.  The president has proposed growing the program six-fold to help colleges gain access to more low-cost loans for students.  But to make the shift, colleges will have to give up the Perkins in-school interest subsidy, given that it would cost the government more than $9 billion to keep the benefit in a vastly expanded program. 

The bill also would reserve some of the new money for a formula rewarding institutions that charge needier students less than the average price per sector (whether through low-tuition or high aid), and to institutions that graduate Pell Grant recipients.  The House bill also calls for some form of an institutional match for the use of future federal Perkins loans.

The proposed changes have colleges already in Perkins concerned that they can't afford the new investment, while those colleges that have generally been unable to get Perkins dollars appear more willing to provide a match. The formula changes are complex enough that institutions don't know how much money they will be eligible for, making it more difficult for them to show how the overall conversion to direct lending will benefit their students.

Other Beneficiaries

Other education sectors also would benefit from the transition to direct lending.  New provisions in the bill would provide funding for elementary and secondary construction, early childhood education, and for elementary and secondary schools in Louisiana, Alabama, and Mississippi that were hit by the 2005 Gulf Coast hurricanes.

The Road Ahead

Congress is still on a timeline to act on legislation in both the House and the Senate before the October 15 deadline in the budget reconciliation instructions approved by Congress last spring.  Since budget reconciliation could tie together health care and student aid reform, the situation is even more complex than just the major higher education policy at hand.  Furthermore, the recent death of Senate education leader Ted Kennedy creates a huge void during one of the most complicated legislative and policy debates in decades.

NAICU continues to work on behind the scenes in negotiations with key education staff, hoping that we can make this bill a victory for both students and colleges.

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