NAICU Washington Update

Early CBO Estimate Highlights Pell Costs Going Up

March 09, 2010

The initial review of the president's FY 2011 budget by the Congressional Budget Office (CBO), released on March 5, is sure to add more fuel to the fire on the student aid reform bill currently before Congress (see related story). In a letter to Senate Appropriations Chairman Daniel Inouye (D-Hawaii), the CBO highlighted increased Pell Grant costs in the agency's initial review of the budget request (see earlier Washington Update story).

CBO says the president's proposal to make the Pell Grant program an entitlement increases mandatory spending by $374 billion over ten years. This ranks it as the biggest education proposal, and the third largest proposal with budgetary impact in the FY 2011 budget, behind only health care reform and refundable tax credits.

New Math

Because $177 billion of the $374 billion cost is considered replacing discretionary spending in the CBO baseline, the net cost of making Pell Grants an entitlement is $197 billion over ten years.  To help offset part of that cost, the president proposes to convert all student loans to direct loans.  Because direct loans cost the government less per dollar loaned than the bank-based program, this creates a savings of $67 billion over ten years to be applied to paying for the Pell Grant entitlement, according to CBO.  However, this still leaves a $130 billion funding gap.


When the president sent this same proposal to Congress last year, the House responded by passing H. R. 3221, the Student Aid Fiscal Responsibility Act (SAFRA). At the time, SAFRA was scored as saving $87 billion through the conversion to direct loans, and costing $40 billion for the mandatory inflation-plus-one-percent increases in Pell Grants over the next ten years. That left $47 billion - with $10 billion to go toward deficit reduction, and $37 billion allocated to Perkins Loans, early childhood education reform, community college reform, and state college persistence and completion activities.

The Senate has yet to take action on its version of the student aid reconciliation bill. This has generated much hand-wringing since January over what a new CBO score could do to the proposed legislation. The preliminary analysis makes those concerns quite real. Pell continues to cost much more because of increased eligibility from the economic downturn and the loosening of eligibility rules in the 2008 reauthorization of the Higher Education Act , plus the conversion to direct loans now entails slightly lower savings because so many institutions have already switched. So what happens to the proposals for Perkins Loans, early childhood, community colleges and graduation initiatives? Do they get cut? Or do they stay in, leaving less for Pell?

The preliminary analysis from CBO raises another concern. So far, Congress has not sent a health care reform bill with budgetary effects to CBO. CBO's letter states that the agency is using the president's proposals on health care reform as a placeholder, "pending the development of detailed legislation." Those proposals would increase mandatory spending by $593 billion over ten years, and raise revenues by $743 billion. This could affect what happens with Pell, since the health care and student aid reform legislation must move together through reconciliation, a budget process intended to ensure deficit reduction.

Timing is everything

Fiscal conservatives or opponents of student loan reforms may push for the updated baseline to be used in legislating since it reflects the current costs of the policies.  However, the CBO letter is just a preliminary analysis, based on the president's budget proposal as submitted on February 1. Whether or not this new score should be used when reconciliation goes to the floor will be a hot debate. Technically, the analysis CBO provided to Congress in last year's budget resolution remains in effect until the agency completes this year's analysis of the president's budget, and Congress passes this year's budget resolution.

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