Ed Money Watch

As part of its efforts to cut the federal budget deficit, Republican leaders in the House of Representatives are considering trying to rescind spending on programs that Congress included in the student loan reform legislation it approved last year. In a report accompanying the House-passed fiscal year 2012 budget resolution, the budget committee’s leaders argue that the legislation, which eliminated the Federal Family Education Loan (FFEL) program and shifted the federal student loan program to 100 percent direct lending, did not produce enough savings to fully finance these initiatives. [Our sister blog, Higher Ed Watch, made a similar point when the bill was being debated.]

At issue is a fight over how the bill was “scored.” Under current law, the Congressional Budget Office (CBO) abides by rules established by the Federal Credit Reform Act of 1990 to estimate and report the cost of new federal student loans that are expected to be made in the current and future years. Using this approach, CBO in March 2010 reported that moving all FFEL schools into the Direct Loan program would provide the government with savings of $68 billion over eleven years.

Republican lawmakers, who nearly unanimously opposed the legislation, argued, with some justification, that this estimate did not provide an accurate prediction of how much money the transition to direct lending would save. Many budget experts believe that estimates calculated using Credit Reform rules tend to understate the costs of federal loan programs by excluding a full measure of the cost of the loans. Thus government’s student loan programs appear profitable for the government even though they are making loans with below-market rates and repayment terms that are universally available to students regardless of their credit history.

With these concerns in mind, Sen. Judd Gregg (R-NH) asked the budget office to re-score the bill using a “market cost” or “fair value” approach -- which many experts, including the CBO, have said provides the most comprehensive measure of a loan program’s costs. Such estimates show the price private entities would charge to offer the same benefits and services -- and bear the risks they entail -- currently offered by the government. As a result, they say, this accounting method more fully reflects the risks that taxpayers bear in making heavily-subsidized loans.

In response to Senator Gregg’s request, the CBO revealed that under the market-based estimates, the amount the government would save from making the switch dropped to $40 billion over eleven years. Despite the fact that the CBO estimate showed that Direct Loans were still much cheaper than FFEL loans, senior Republican lawmakers trumpeted the report, arguing that it showed that Democrats had misrepresented the savings the legislation would produce.

Democratic Congressional leaders, however, rejected this argument and accused the Republicans of “trying to cook the books,” in requesting the fair-value cost estimate. They said they saw no reason to doubt the CBO’s official cost estimate and, therefore, would stick with it.

Now the Republican leaders of the House Budget Committee are taking the Democrats to task over this decision. Noting that the President’s Commission on Fiscal Responsibility and the Peterson-Pew Commission on Budget Reform have recommended that policymakers use “fair-value accounting for all Federal loan and loan guarantee programs to enable the true assessment of their cost to taxpayers,” the committee report says that the legislation’s authors spent more than they could afford. To remedy the situation, the report says that Congress should consider cancelling “future spending [provided in the 2010 law] in the following ways":

• Repeal the expansion of the Income-Based Repayment [IBR] program: The final legislation included a provision, proposed by the Obama administration, to increase repayment relief for financially distressed student loan borrowers. Currently, borrowers in IBR do not have to make payments on their federal Stafford loans that exceed 15 percent of their discretionary income, and can have their remaining debt forgiven after 25 years. Under the bill, starting with students who take out their first loan after 2014, the cap is reduced to 10 percent, and outstanding debt can be forgiven after 20 years. Noting that program, which was created in 2007, is “relatively new,” the report states that “Congress should ensure the program is meeting its intended goals before it is expanded.” Eliminating this provision would save about $1.5 billion over 10 years (although nearly all the savings would occur in the last five years of that time period). The savings would also likely be higher using fair-value estimates, since that accounting method likely shows the IBR repayment option provides greater subsidies to borrowers than the official rules.

• Eliminate new funding included in the legislation for the College Access Challenge Grant program, which provides matching grants to states to support efforts to prepare more low-income students to enroll and succeed in college. The student loan reform bill “dedicated mandatory spending to this discretionary program regardless of its effectiveness and created a ‘funding cliff’ with resources abruptly terminating in 2014. Killing this provision would save about $750 million over five years.

• Eliminate a set-aside that the legislation created for non-profit lenders to service Direct Loans. The legislation “established two separate funding categories for Direct Loan servicing contracts, a mandatory stream for eligible non-profit servicers and a discretionary stream for other servicers,” the report says. “Both of these types of servicers should be funding with discretionary funds.” As Higher Ed Watch reported last week, canceling the mandatory carve-out for non-profit servicers could save the government $730 million over five years and $1.2 billion overall, based on the original cost estimates of the provision done by the Congressional Budget Office in 2010.

• Eliminate mandatory funding that the legislation included to provide competitive grants to community colleges that serve dislocated workers in order for them to expand and improve their online course offerings. Funding for this program comes from the Department of Labor’s Trade Adjustment Assistance program, which had never been funded previously. “This is a discretionary program that should not be funded with mandatory funds,” the report states. This proposal would save $2 billion over five years.

Democratic Congressional leaders and Obama administration officials are likely to again reject the House Budget Committee’s complaints about how the student loan reform bill was scored. But given the intense pressure on Capitol Hill and the White House to slash the federal budget deficit and find money to shore up the Pell Grant program, they may have little choice but to give at least some of these proposals a second look.

At Ed Money Watch, we will continue to watch these developments closely. Stay tuned.

The fiscal year 2011 appropriations process has been a frequent topic here on Ed Money Watch since the process first got started early in 2010. The prolonged process finally came to an end in mid-April of 2011, resulting in some significant changes to education funding. Today, the Federal Education Budget Project (FEBP), Ed Money Watch's parent initiative, released an issue brief that explains the recently finalized fiscal year 2011 federal education appropriations.

Congress completed the fiscal year 2011 appropriations process on April 14th, 2011, finalizing annual funding for nearly all federal education programs through September 30, 2011 at $68.3 billion, up $4.2 billion from the prior year. Making sense of the federal education budget and the appropriations process can be a frustrating task for education advocates, state and local policymakers, the media, and the public. The fiscal year 2011 appropriations process has been particularly confusing. Congress bypassed several steps in the normal budget and appropriations process this fiscal year. Lawmakers chose not to debate or adopt an annual budget resolution that sets funding limits for appropriations bills, and lawmakers failed to bring the appropriations bill that funds education programs up for a vote in either chamber. Instead, Congress passed a series of stop-gap funding bills that temporarily provided fiscal year 2011 funding at prior year levels for programs subject to annual appropriations, though funding for some education programs was reduced or eliminated along the way. A full six months into fiscal year 2011, Congress ultimately passed an appropriations bill for the remainder of the fiscal year that funds all federal agencies and programs subject to the annual appropriations process.

This issue brief is a helpful guide to the appropriations process and recently enacted fiscal year 2011 education funding. It includes an analysis of funding for major education programs and a timeline of the 2011 appropriations process. It also includes tables comparing 2011 funding to earlier House and Senate proposals, prior year funding levels, and the president's 2011 budget request.

To download the issue brief, click here.

Last week we wrote that the fiscal year 2012 appropriations process is well underway—at least in the U.S. House of Representatives. Yesterday the House Appropriations Committee passed another key milestone in the fiscal year 2012 appropriations process that has important implications for federal education funding.

The U.S. House of Representatives passed a fiscal year 2012 budget resolution in April that set a total limit on appropriations funding for the fiscal year 2012 spending bills, known as the 302(a) allocation. It sets a limit of $1.019 trillion, or about $31 billion less than fiscal year 2011. Yesterday the House Appropriations Committee announced how it plans to divvy up that funding limit among the 12 appropriations subcommittees, called the 302(b) suballocations.

The House allocated $139.2 billion to the Labor, Health and Human Services, Education Subcommittee (Labor-HHS-Education), which has jurisdiction over nearly all programs in the Department of Education. For fiscal year 2011, the comparable figure is $157.4 billion. In other words, the House has signaled that later in the year, when it drafts its version of the fiscal year 2012 appropriations bill that funds education programs (as well as Labor, HHS, and related programs), total spending will be $18.2 billion lower than the current year. (The allocations are still preliminary and the Committee could vote to change them before an appropriations bill is finalized.)

It’s important to note that the House hasn’t specified any funding for specific education programs yet—only aggregate numbers for total appropriations funding and for the Labor-HHS-Education spending bill. However, the $18.2 billion reduction in total spending for that bill makes significant spending reductions for some education programs highly likely. But that information won’t be available until the Labor-HHS-Education Appropriations Subcommittee makes a draft bill public in the coming weeks.

It’s also important to keep in mind that the Senate has taken no action so far in the fiscal year 2012 appropriations process. Any final spending bill that gets signed into law also has to clear the Senate, which is controlled by Democrats. And the president will weigh in as well.

The Senate is still weeks away from any formal debate or vote on a budget resolution, and probably months away from any meaningful action in the Labor-HHS-Education Appropriations Subcommittee. The Senate isn’t likely to go along with the House Republican’s proposed spending limits for fiscal year 2012, at least not without a fight.

So for now, it looks like the House Appropriations Committee has staked out its side of the fiscal year 2012 appropriations negotiating table early. All eyes are on the Senate.

Since Congress passed the American Recovery and Reinvestment Act (ARRA) in 2009, many policy researchers and the media have focused their attention on the law’s funding for K-12 education. As a result, much of the reporting and analysis on the ARRA has overlooked the significant funding that the law provided for higher education. In response to this lack of coverage, the New America Foundation's Federal Education Budget Project recently released an issue brief titled The State Fiscal Stabilization Fund and Higher Education Spending in the States, Part 2 that explores how states chose to divide their ARRA State Fiscal Stabilization Funds between K-12 and higher education.

The ARRA was intended to stimulate the economy with $862 billion in new spending and tax cuts. The law included nearly $100 billion in one-time funding for new and existing education programs, a historic sum given that annual appropriations for federal education programs were approximately $60 billion in fiscal year 2009. The largest single education program included in the law was the State Fiscal Stabilization Fund (SFSF), a new $48.6 billion program that provided direct grant aid to state governments in 2009 and 2010. The program was designed to help states maintain support for both K-12 and higher education that they might have otherwise cut in response to budget shortfalls brought on by the economic downturn.

The SFSF requires that states use the funds for both K-12 and higher education in proportion to each sector’s share of a state's budget shortfall. It is important to keep in mind that when a state faces a budget shortfall, its legislature decides how to adjust spending to bring the budget into balance. State lawmakers have flexibility over the extent to which they will reduce funding for K-12 or higher education (or both) in response to budget shortfalls. In a state where the legislature made a 60 percent cut to K-12 spending and a 40 percent cut to higher education spending compared to the previous year, the SFSF regulations require that state to spend 60 percent of its allocated Education Stabilization funds on K-12 education and 40 percent on higher education. States where the legislature chose to spare higher education funding from spending cuts could use the funds to fill only the gaps created by cuts to K-12 education.

By examining how states divided their SFSF allocations between K-12 and higher education by fiscal year, we can make general conclusions about how the ARRA may have affected state spending on higher education.

Using data on SFSF allocations collected directly from the states, the paper concludes that states spent the majority of Education Stabilization funds on K-12 education – roughly 78.9 percent of the total $39 billion available for Education Stabilization funds. The remaining 21.2 percent - $8.3 billion – were spent on higher education. This allocation of funding between K-12 and higher education mirrors the typical state budget, in which states tend to spend far more on K-12 than higher education each year. This indicates that most states chose to make larger budget cuts to K-12 education than to higher education in response to lower tax revenues resulting from the economic recession. 

However, five states – Colorado, Louisiana, Montana, Nevada, and Wyoming – spent a greater percentage of their Education Stabilization funds on higher education than K-12 education over the three fiscal years that the funds were available. This suggests that, when confronted with budget shortfalls, these states chose to make cuts to higher education spending rather than K-12 spending and fill those gaps with Education Stabilization funds. When the State Fiscal Stabilization Funds run out at the end of fiscal year 2011, these states will no longer have federal funding to support higher education budget gaps. It remains to be seen whether they will be able to support their public higher education systems absent continued federal support.

Though more of the funds went to K-12, the SFSF did play a significant role in higher education funding in many states in 2009, 2010, and 2011. Most states did not protect higher education from budget cuts during the economic downturn and in some cases made larger cuts to higher education than K-12 education. While it is impossible to speculate on whether, and how, states would have cut higher education spending absent the Education Stabilization funds, it is clear that the funds helped to keep higher education budgets afloat in many states. 

To download the issue brief, click here.