NAICU Washington Update

House and Senate Lay Out Budget Plans for FY 2014

March 22, 2013

Updated March 28, 2013

The next round of political budget football began on March 13, as both the House and Senate Budget Committees released their plans for the Fiscal Year 2014 budget. Each plays to its chamber’s majority, lays out their party’s messaging around deficit reduction, and also represents the starting points for the next budget battles.

Congressional budget resolutions are guides for the Congress to use in determining spending and tax policy for the coming fiscal year. They are not bills that the president signs into law. Budgets resolutions are also political statements on priorities -- right now, Republicans insist there be more deficit reduction from spending cuts, not more taxes, and that defense be protected; while Democrats insist there be more tax increases for deficit reduction, and no cuts to domestic spending and entitlements.

Most importantly, while budget resolutions may “justify” the spending levels they propose by recommending certain programmatic cuts, these specific ideas are simply justifications within the caps they set. So, for example, while the House Budget suggests Congress could spend less on Pell Grants by limiting eligibility in a number of ways, nothing in the Budget process, itself, could actually enact those changes into law. However, ideas that are first seen in budget resolutions are to be taken seriously, as they often gain legs in later legislation. The most binding action in Budget Resolutions is reconciliation instructions for Committees to enact entitlement spending cuts. The student loan program has had dramatic changes over the years through this mechanism.

House Republican Plan

The House budget plan balances the budget in 10 years, without raising taxes, by dramatically cutting non-defense spending and entitlements. For all non-defense programs, the House budget lowers spending below the current sequestration level of $469 billion, to $414 billion. For Function 500, the category for education, training and social services, the budget resolution provides $56.4 billion for appropriated programs.

The House plan would maintain the current Pell Grant maximum of $5,645, but assumes that it is funded completely out of regular, discretionary appropriations (it currently has some funding from mandatory funds which are funds on the entitlement side of the budget). Right now, the Pell Grant program costs about $32 billion. Funding Pell at this level through appropriations would be a serious strain on the rest of education funding in the $94 billion category. So, the House budget resolution assumes reforms are made to the program to make it “sustainable,” which means it cost less, and is more narrowly targeted to the neediest students. The reforms include: rolling back need analysis expansions to pre-2007 levels; eliminating administrative fees to institutions; setting a maximum income cap for eligibility; eliminating less-than-half-time students; changing return of Title IV regulations; and eliminating planned growth in the maximum award. The committee recommendations are here.

The budget document also addresses several important student loan issues. Citing the Bowles-Simpson Fiscal Commission, and stating that “there is no evidence that in-school interest subsidies are critical to individual matriculations,” the committee assumes the elimination of the in-school interest subsidy for undergraduate loans. Graduate in-school interest and the repayment grace period were both eliminated in 2011 and 2012, as Congress and the White House focused on maintaining the 3.4 percent student loan interest rate in an election year.

The interest rate on subsidized loans is scheduled to jump again to 6.8 percent on July 1, but the House budget resolution does not directly address this upcoming change. However, it provides a reconciliation instruction to the Committee on Education and the Workforce to pass legislation that reduces the deficit by $1 billion over 10 years out of legislation in its jurisdiction. The only place to find that amount of savings is in the student loan programs, so this “instruction” adds even more pressure to the education committees who already need $5 billion to prevent the interest rates on student loans from jumping to 6. 8 percent on July 1.

More directly, the budget proposes changing the accounting method the federal government uses to calculate the cost of student loans in the federal budget. For several years, House Republicans have been promoting “Fair-Value Accounting” instead of the “Fair Credit Reform Act of 1990” (FCRA) method currently in place (see related loan hearing story). Fair-Value Accounting is intended to show the costs and risks of student loans based on discount rates used by the private sector, while the FCRA method (called “net present value”) looks at the actual long-term costs to the government for loans on the date of issue through final repayment, including default and collection costs. While this is a highly technical debate, it could have serious implications for student loans. Under net present value, the Congressional Budget Office estimates that currently the government makes a $35 billion a year profit on federal student loans, while Fair-Value Accounting would show a loss.

Other eliminations in mandatory spending in this plan include: repeal the expansion of income-based loan repayment; repeal College Access Challenge Grants; shift payments for non-profit servicers to discretionary appropriations; and shift Community College Transition Assistance to discretionary appropriations. The elimination of the in-school interest subsidy for undergraduates would hurt borrowers even more if it were accompanied by a retrenchment in the benefits of income-based repayment as suggested.

To round out the House Republican perspective on higher education, the resolution includes a “Policy Statement on Higher Education Affordability,” which outlines the latest data on tuition increase rates, and says Congress should “address the root drivers of tuition inflation, by (1) targeting Federal financial aid to those most in need; (2) streamlining programs that provide aid to make them more effective; (3) maintaining the maximum Pell Grant award level at $5,645 in each year of the budget window; and (4) removing regulatory barriers in higher education that act to restrict flexibility and innovative teaching, particularly as it relates to non-traditional models such as online coursework and competency-based learning.” Link to legislative language

Senate Democrats

The Senate budget plan does not attempt to balance the budget, but meets the target of $4 trillion in deficit reduction over 10 years, suggested by the Bowles-Simpson Fiscal Commission in 2011.  The Senate plan assumes the sequester cuts are reversed, and applies the $2.4 trillion already achieved in deficit reduction since 2011, to an additional $970 billion in spending cuts and $975 billion in new revenues to meet the target. 

For non-defense spending, the Senate budget provides $506 billion, which is the statutory spending cap for non-defense set in the Budget Control Act of 2011, aka “the Debt Ceiling bill.”  Within the cap, the Senate budget provides $89.6 billion for Function 500, which covers education, training, and social services.  While there are no program-specific funding details in the Senate budget, the materials accompanying the plan says that it “seeks to expand access to college for all Americans by eliminating the student loan fee increase from sequestration, by retaining subsidized loan and repayment programs, by continuing our commitment to college affordability through Pell Grants, and by asking colleges and universities to be part of the solution to rising tuition costs.”

In the legislative language, the budget plan includes a deficit-neutral reserve fund for higher education, which allows the Budget Committee to revise allocations for legislation “that make higher education more accessible and affordable, which may include legislation to increase college enrollment and completion rates for low-income students, or promote college savings.”  This is not the same as a reconciliation instruction, which requires deficit reduction and gives the Senate special procedures for fast-track passage on the floor.

Next Steps

Both chambers passed their plans before leaving town for a two week spring break. Now, they will take separate steps to move forward with appropriations bills for FY 2014.  Assuming no action is taken to reverse sequestration, total spending for FY 2014 will be $966 billion, a $16 billion reduction from last year.  How the appropriations committees divvy that up that smaller pie will be telling. 

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