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A Blog from New America's Federal Education Budget Project

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A Rare Bit of Good News for Pell Grants: A Surplus

Published:  December 6, 2011

Here’s some good news for Pell Grants. Budget analysts expect the program to run a small surplus in fiscal year 2012. It turns out that Congress overfunded the program ever so slightly over the past few years, and as lawmakers look to finalize fiscal year 2012 funding in the coming days, they are likely to overshoot just a bit on Pell Grant funding. This is particularly good news because for the past few years Congress has done just the opposite—lawmakers have knowingly underfunded the program, throwing fuel on the Pell Grant funding fire.

Because Pell Grants operate like an entitlement, but one for which Congress has to actually appropriate funding (real entitlements don’t need annual appropriations, they are automatically funded), Congress has to estimate how much the program will cost at least a year in advance. That estimate changes throughout the year as new data on student enrollment, income, etc. become available.

For the past few years, these estimates have increased from their initial levels. But each year, Congress stuck with the earlier (and much lower) cost estimate when it finally set Pell Grant funding. For example, by the time Congress set Pell Grant funding for fiscal year 2010, the Congressional Budget Office had upped its cost estimate for the program by some $3.1 billion. Congress went with the lower estimate provided earlier in the year because it meant they had to find less support for the program. For fiscal year 2011, Congress did the same thing to the tune of $2.5 billion.

To be fair, budget rules say CBO’s March estimate is the only one Congress needs to abide by. But knowingly underfunding Pell Grants has helped to fuel the crisis-like atmosphere that surrounds the program’s annual appropriation.

When Congress knowingly underfunds Pell Grants based on the most recent cost estimate, it digs a hole for itself. Students still get their grants even if there’s not enough funding, so Congress has to fill in this hole with next year’s appropriations bill. Congress has to spend money first to get the Pell Grant program out of debt for the previous year before it can fund the program for an upcoming fiscal year.

Now it appears the trend is reversing. As Congress works to finalize fiscal year 2012 funding for Pell Grants, the March cost estimate might be a bit too high (maybe by $300 million). The first hint of this came from the Office of Management and Budget’s mid-year estimates, but information from the agency doesn’t explain the cause. More recently, sources on Capitol Hill say changes to the cost estimate reflect spillover from fiscal year 2010 Pell Grant funding that proved more than adequate once all eligible students received their grants. That in turn made the fiscal year 2011 grants slightly overfunded, which reduces what Congress needs to provide for fiscal year 2012.

That means as the fiscal year 2012 appropriations process comes to a close, Congress must still abide by the March Pell Grant estimate, and will therefore be knowingly overfunding the program when measured by the most recent estimate—but just barely. That’s a big reversal from the $3.1 billion and $2.5 billion in underfunding from the past two years, respectively.

Importantly, this overfunding means that when the fiscal year 2013 appropriations process starts early next year, the Pell Grant budget won’ t start in the hole. In other words, Congress will only need to worry about funding fiscal year 2013 Pell Grants with the fiscal year 2013 appropriation. While that alone will be a big challenge, at least Congress needn’t backfill the fiscal year 2012 grants too.

A rare bit of good news for Pell Grants indeed.

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