NAICU Washington Update

Pell in Crisis: Could the Hybrid Run Out of Gas?

March 09, 2010

As debate on the health care bill reaches frenzied proportions in Washington, there has been growing media attention to the student aid reform bill that is legislatively linked to health care reform through the reconciliation process (see October 8 Washington Update story).  That coverage has focused almost exclusively on the bill's direct lending mandate, and the effect on the student loan industry and local jobs. 

Lost in the frenzy is the fact that the student loan and health care reform bill will also have a profound effect on funding for the Pell Grant program - the foundation student aid program that helps millions of low-income students pay for college.

How Pell is Funded

The Pell Grant program has always functioned as a "quasi-entitlement program."  Under this concept, if in any given year the program costs more than Congress has funded, student grants are not reduced.  Instead, the government fully funds the grants, and the program has a "shortfall."

Until 2007, all Pell Grant funding was under the discretionary (i.e., non-entitlement or non-mandatory) side of the budget through Congress's annual check-writing process.  As with other discretionary programs, the maximum grant level was set by the appropriations committees each year, and the individual eligibility requirements were determined by the authorizing committees through the Higher Education Act.

This funding process for Pell Grants changed dramatically in 2007, when Pell became a "hybrid" program.  It continued to be primarily funded through the annual check-writing process, but with a new mandatory "add-on" to each student's maximum grant, starting at $490 and growing to $1090 over five years through the College Cost Reduction Act (CCRA).  The "add-on" funding stream was generated by cuts to the student loan program, and will last until 2013, when the extra money runs out (see chart).

In 2008, President Obama campaigned on making the Pell Grant program a full entitlement, putting all of the funding on the mandatory side.  Once elected, his FY 2010 budget proposed to convert all student loans to direct loans, and transfer the savings to funding the full mandatory Pell grant.  Also proposed in his budget were automatic increases in the maximum Pell Grant each year by inflation plus one per cent.

In 2009, the House of Representatives was able to go part of the way with Obama's proposal, by passing the Student Aid Fiscal Responsibility Act (SAFRA), converting all student loans to direct loans.  Instead of making Pell funding mandatory, though, the bill codifies the hybrid Pell Grant program.  This assumes that appropriators will continue to write annual checks for a base grant of $4,860, while using mandatory money from the conversion to direct loans for an annual add-on of inflation plus one percent.  SAFRA would conservatively raise the maximum grant to $6,900 by 2019.  The Senate has not yet acted on the bill, given that it is waiting for health care reform in order to link the two bills together.

While all of this was moving through Congress, though, the economy tanked and the new Higher Education Act went into effect.  The new HEA added more costs to the Pell grant program by loosening eligibility requirements.  At the same time, the economic downturn led to more low-income students signing up for postsecondary education, and more families showing greater need.  As a result, financial aid applications increased by 20 percent, and there were one million more Pell Grant recipients in 2009-10.  To further help financially stressed students, Congress passed the 2009 stimulus bill, which raised the Pell Grant maximum by an additional $500 for two years.

The net effect of these various changes is profound.  Pell Grant program costs have increased from almost $15 billion in 2007, to over $30 billion in 2010.  In 2007, there were five million recipients, and 8.3 million in 2010.  There is currently an estimated $8 billion shortfall.  To summarize, the Pell Grant program is popular, growing fast, and continually costing more than expected.  And while the hybrid approach to funding the program has worked for a few years, it could soon run out of gas.

Democratic budgeteers, authorizers, appropriators and leadership all see SAFRA legislation as the only way to fix the impending funding crisis in the Pell Grant program.  SAFRA would fill in the holes from the impending "funding cliffs" when stimulus and CCRA funds run out, and would ensure a guaranteed future increase in the maximum grant of inflation plus one percent.  It also includes at least some funding for the program's shortfall.

Because of the student aid bill's link to health care reform, and the need to package the two into one reconciliation bill, these same leaders are not sure they can summon the votes to pass either or both bills.  Health care reform, student aid reform, reconciliation, and vote counts aside, what really matters is ensuring that low-income students have the grants they need to pay for college in tough economic times.

Over 8.3 million students, with income ranges from $0 to $30,000, at all types of institutions of higher education received $32.2 billion in Pell Grants this year.  This grant aid is essential if they are to stay in school, graduate, retrain for a new job, or meet the demands of declining family income.

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