Student Aid

Media reports indicate that the House and Senate have reached an agreement on fiscal year 2012 funding for the U.S. Department of Education as part of an omnibus spending bill that covers multiple federal agencies. Many education supporters have been waiting to see how Congress will fund the Pell Grant program for fiscal year 2012 (which will support grants in the 2012-13 academic year) given that the House and the Senate had previously proposed very different plans for the program. Although both chambers proposed maintaining the current maximum grant of $5,550, a House draft would have made nearly a dozen changes to eligibility rules that reduced the cost of the program, while the Senate proposed redirecting money spent on student loan subsidies to Pell Grants.

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This post was updated December 16th.

The House and Senate have reached an agreement on fiscal year 2012 funding for the U.S. Department of Education as part of an omnibus spending bill that covers multiple federal agencies. Many education supporters have been waiting to see how Congress will fund the Pell Grant program for fiscal year 2012 (which will support grants in the 2012-13 academic year) given that the House and the Senate had previously proposed very different plans for the program. Although both chambers proposed maintaining the current maximum grant of $5,550, a House draft would have made nearly a dozen changes to eligibility rules that reduced the cost of the program, while the Senate proposed redirecting money spent on student loan subsidies to Pell Grants.

The final bill includes the Senate’s student loan changes and a handful of the eligibility rules sought by the House. Specifically, the student loan provision, which would charge borrowers with subsidized Stafford loan interest during the six-month repayment grace period, would save $400 million that could be spent on Pell Grants in fiscal year 2012. Pell Grant eligibility changes in the final bill reduce the income allowable to qualify an applicant for a maximum grant under the “automatic zero” expected family contribution calculation; require Pell Grant recipients to have a high school diploma, a GED, or have been homeschooled; reduce the number of years a student can use Pell Grants from nine to six years; and require that a student be eligible for 10 percent of the maximum grant instead of 5 percent to receive the minimum grant.

Offical estimates of the omnibus appropriations bill show that the cost reductions from eligibility changes and the redirected student loan subsidies reduce the necessary total appropriation to maintan the maximum Pell Grant. Accounting for eligiblity changes and the reallocated savings from student loan changes and a reduction in the cost of the entitlement portion of the Pell Grant program, Congress needed to appropriate $22.8 billion to maintain the $5,550 maximum grant. That is slightly less than the $23.0 billion appropriated in 2011.

Of course, that isn’t the total cost of the program for fiscal year 2012. The Budget Control Act (the debt ceiling negotiation) provides a supplemental $10 billion for the program. A separate entitlement formula (one that doesn’t require annual appropriations) will kick in another $5.2 billion. The bill also redirects $612 million to the 2012 grant from student loan subsidy cuts and future savings under the entitlement portion of the Pell Grant program. After $2.5 billion is deducted to repay a shortfall in last year's grant, the Pell Grant program will cost about $36.1 billion in fiscal year 2012.

The attached table details the final cost estimate for fiscal year 2012 funding for the Pell Grant program.

The Senate’s plan for funding the fiscal year 2012 Pell Grant hit a snag last week – the Republican-controlled House Budget Committee blocked a provision in the Senate proposal that would use fiscal year 2013 funding to support the fiscal year 2012 grant. The House and Senate have each staked out a Pell Grant funding plan for the upcoming school year, but a final compromise bill is still weeks or even months away. Suffice it to say the two proposals are very different (see our earlier post here) so the recent budget ruling on the Senate bill will only complicate a final compromise bill.

The Senate bill (S. 1599), which has been approved by the appropriations committee, not the full Senate, would provide the $24.3 billion needed to maintain the $5,550 maximum grant in the 2012-13 school year. Except some in Congress claim the bill falls $896 million short of that target.

Specifically, the Senate’s proposed Labor-HHS-Education appropriations bill provides a regular appropriation of $23 billion for Pell Grants in 2012, plus a supplemental $1.3 billion. The supplemental funding is offset (i.e. paid for) by a provision in the bill that ends the interest-free benefit on Subsidized Stafford loans during an undergraduate borrower’s six-month grace period after leaving school.

This change, however, doesn’t fully offset the $1.3 billion in supplemental funding that the bill would provide in fiscal 2012. It only offsets $400 million, leaving $896 million not offset.

However, eliminating the interest rate benefit creates savings every year because it ends an ongoing policy, meaning that savings accrue in fiscal year 2012 and following years. The Senate bill uses those future year savings to allocate the Pell Grant program extra funding in fiscal year 2013. Then, the bill includes language allowing exactly $896 million of that extra fiscal year 2013 funding to support fiscal year 2012 Pell Grants.

While shifting the timing of these funds wouldn’t affect the operation of the Pell Grant program, members of the House Budget Committee successfully argued (successfully ruled might be more apt) it sets a precedent that funding provided for Pell Grants for a future year could be raided to pay for a current year – creating a massive funding cliff. Supporters of the Senate proposal, on the other hand, say the budget rules that apply to the Pell Grant program allow for the timing shift since the rules specifically reference “award year" and not “fiscal year.” (An award year overlaps two fiscal years.)

But those who have argued against the Senate’s provision make a good point. The debt ceiling law enacted earlier this year (the Budget Control Act) provided supplemental funding for Pell Grants in both fiscal years 2012 and 2013, giving the program an emergency lifeline for two years. Congress could use a provision like the one in the Senate’s proposed funding bill as a precedent to justify shifting the $7 billion the debt ceiling law provided for fiscal year 2013 into fiscal year 2012.

If the Senate proposal is ultimately enacted, students will not receive smaller Pell Grants than they otherwise would have without this new snag. But it does mean the Senate Labor-HHS-Education appropriations bill is over its spending limit and must be trimmed before becoming law. In other words, the bill has to spend $896 million less than it currently does. That isn’t a lot of money in the grand scheme of the Labor-HHS-Education appropriations bill.  Even so, “finding” $896 million at this stage in the appropriations process visibly pits one program (Pell Grants) against a lot of others.

That’s certainly a cause for concern among Pell Grant supporters, especially during these desperate budget times. And you know what they say about desperate times…

This week everyone has been talking about student loans. The Obama administration announced some minor changes to the Direct Loan program. Separately, the House Education and Workforce Committee held a hearing to examine the program’s performance since Congress ended the bank-based guaranteed loan program last year. At the same time, some “Occupy Wall Street” protestors have been demanding relief from student loans. With all this attention on federal student loans, the direct-loans-are-profitable-for-the-government argument has been out in full force.

For example, at the House hearing Rep. John Kline (R-MN) said an interest rate of “6.8 percent when the federal government is borrowing at less than 1 percent can create a pretty big slush fund.” Democrats on the committee agreed with Kline that the government is earning money off of the program but argued lawmakers should consider lowering the interest rate that students pay to no more than what it cost the government to borrow and pay for loan defaults.

Generally, liberals, student advocates, and lobbyists for colleges say that Direct Loan profits suggest that the government is “overcharging students.” To conservatives and student loan companies, Direct Loan profits mean the government is competing with private businesses in providing a for-profit service.

Those would all be valid arguments except for the fact that the Direct Loan program doesn’t make money and it isn’t profitable.

The Direct Loan program issues about $100 billion in new student loans each year with over $500 billion in loans currently outstanding. The program charges undergraduates fixed interest rates between 3.4 percent and 6.8 percent. Graduate students get the same rates, but can borrow additional amounts at 7.9 percent interest rates under the Grad PLUS program. All students qualify for at least some type of loan regardless of their financial need. Repayment plans can be as long as 30 years and borrowers experiencing “economic hardship” can postpone payments for up to three years under deferment and forbearance policies, or can repay under income-based repayment plans. The government also forgives loans under a number of circumstances.

It’s common knowledge that banks make money by borrowing at low interest rates and making loans at higher rates. In the most basic sense that is a fair characterization. Many people therefore assume that Direct Loans are profitable for the government because the fixed interest rates borrowers pay are twice as high (or more) as what it costs the government to borrow.

But if the profitability of the loans is simply equal to the difference between these two interest rates, why don’t private banks make student loans at the same terms as the government? They can borrow at low rates too.

Take a look at the interest rate banks pay on savings accounts. It’s less than a third of a percent. A ten-year certificate of deposit pays 2.5 percent interest. Those rates are pretty close to U.S. Treasury rates, and they should be – bank deposits are insured by the federal government. They are certainly lower than the interest rate the government charges on student loans. But you won’t see your local non-profit credit union offering terms as good as a federal Direct Loan. That is because banks believe making loans at those interest rates and with those types of repayment plans is too risky relative to what the bank can expect to get in return. In other words, private banks are not willing to take on the risk associated with these loans at such low interest rates.

Of course, there are far more technical and complicated ways to explain why Direct Loans don’t make money, but we will leave those for another time. For now, take it as proof that not even the most efficient, most profitable banks in the country make loans as generous as those in the Direct Loan program because it is a money-losing endeavor.

It’s not bad, however, that the loans don’t make money. They aren’t supposed to. In fact, the government’s loss on the loans serves as a subsidy for the student who borrows to pay for school. According to a 2010 Congressional Budget Office study(page 10), the typical student gets a 12 percent subsidy on his federal Direct Loan. Put another way, the borrower receives a government benefit worth 12 percent of the amount he borrows. A $5,000 loan, therefore, provides a $600 government benefit to the student.

Regardless of these facts, any debate about federal student loans will inevitably be based on the false premise that the loans are profitable for the government. When the interest rate on subsidized Stafford loans jumps from 3.4 percent to 6.8 percent next school year, you can be sure there will be cries of usury. And as the Obama administration makes the case that the incentives it offers students to switch their loans over to the Direct Loan program save money overall, you can be sure some lawmakers will claim all of those savings come from profits earned off of students. Neither argument is true.

As we wrote earlier this week, the House Appropriations Committee’s Labor-HHS-Education Appropriations bill for fiscal year 2012 makes numerous changes to eligibility rules for the Pell Grant program. These changes lower the cost of the program by $3.6 billion in 2012, meaning Congress needs to the fund the program at only $20.7 billion to maintain the maximum grant of $5,550 for the 2012-2013 school year. That’s down $2.3 billion from 2011 levels. Naturally, some of the eligibility changes affect the cost of the program more than others. According to a preliminary Congressional Budget Office (CBO) estimate, however, the changes that lower the cost of the program the most are surprising.

Upon first reading the House Committee’s appropriations bill, the change that most struck us at Ed Money Watch is the elimination of Pell Grants for students attending school less than half-time. This change would prevent students going back to school at night to earn a degree over several years from receiving Pell Grants. But while this would have a significant effect on individual students, the cost reduction from this change are actually quite small – $109 million in 2012 and $555 million over five years. In other words, if Congress approved the less-than-half-time eligibility change, the annual appropriation needed to fund a maximum grant of $5,550 would be $109 million less than it would be without the change.

The proposed reduction in the maximum number of semesters a student can receive a Pell Grant – from 18 to 12 – results in relatively large cost reductions: $535 million in 2012 and $2.7 billion over five years.

But the change that would result in the greatest savings is the reduction in the amount of a student’s personal earnings that can be excluded from a Pell Grant award calculation. This change, which affects different types of students differently, would reduce the appropriation required to keep the maximum grant at its current level by $1.6 billion in 2012 and $9.1 billion over five years.

While there is currently little information available on how this change would affect Pell Grant recipients, it’s worth reviewing what role the income protection allowance plays in determining who gets a Pell Grant and how much aid a student could receive.

Pell Grant awards are based on a student’s Expected Family Contribution (EFC). The EFC is determined by subtracting a family’s expenses (including living expenses, retirement needs, and tax liability) from its total income and, in some cases, assets and then identifying a reasonable percentage of that remaining income to support postsecondary education costs. The EFC is calculated slightly differently for students depending on whether they are dependents, independents with dependents (such as children), or independents without dependents. Importantly, if a student is independent, then the calculation does not include any financial information from his or her parents.

Once a student’s EFC is calculated, a student’s Pell Grant award size is the lower of (1) the total maximum Pell Grant (currently $4,860) minus the student’s EFC, or (2) Cost of Attendance (COA) at the student’s institution of higher education minus that student’s EFC. Students that are attending school less than fully time receive an award that is ratably reduced. After a student’s basic award is calculated, a mandatory award of $690 is added to the total amount (resulting in a total maximum award of $5,550).

The change in the income protection allowance means that more of a student’s personal earnings would be included in their EFC calculation than are currently, resulting in a smaller Pell Grant award overall. And students who may have otherwise qualified for a small grant may get none.  But the change would be different for different students. For some students, the amount of personal income they can exclude from their EFC calculation would decrease by as little as $2,710. But for others, the exclusion would decrease by $7,000 or more.

For dependent students, the amount of personal earnings that would be excluded from the EFC calculation would decrease from $6,000 to $3,290. For independent students without dependents who are single or who are married to spouses who also receive Pell Grants, the amount would decrease from $9,330 to $6,620. For independent students without dependents who are married to spouses that are not receiving a Pell Grant, the personal income exclusion would drop over $4,000 from $14,960 to $10,620. The personal income exclusions for independent students with dependents, which changes depending on the total size of the student’s family, would decrease by significant amounts starting with $6,850 for a family of two. Click here to see a side by side comparison of these changes to the personal income protection exclusion with the current law.

In the end, each of the changes the House appropriations bill makes to Pell Grants will have varying effects on the discretionary cost of the program (we’ll leave a discussion of the effects on the mandatory/entitlement cost for another time). Some of the changes are relatively insignificant, saving less than $100 million in 2012, while others are huge, like the personal income exclusions described above. But each of these proposed changes will be important bargaining chips as the House and Senate negotiate a final fiscal year 2012 appropriations bill over the coming weeks and find a way to pay for the 2012-13 academic year’s Pell Grant.

[For the last two weeks at Higher Ed Watch, we have run posts from student aid expert Mark Kantrowitz (see here and here) in which he argued that the financial aid award letters that colleges send out each spring need to be standardized both to protect the best interests of students and their families and to make them easier to understand and compare. Because this is an important public policy issue, we invited Justin Draeger, the president of the National Association of Student Financial Aid Administrators, to provide an opposing view. He took us up on the offer. Read on to find out why Draeger believes that "a federally mandated, standardized form" would do more harm than good.]

By Justin Draeger

Financial aid award letters can and should be improved to better help students understand the costs of higher education and the aid available to them. But a federally mandated, standardized form would fail to meet the needs of students, create more confusion, and stifle institutional innovation. Instead, we should focus on standardizing terms and definitions and promoting key elements to be included in each award letter.

One Size Does Not Fit All

If all colleges and student populations were the same (or even similar), then a standard award letter could be useful. Because there is so much variety, institutions need the flexibility to design unique award letters that highlight information that is most relevant to their student demographic. A cooperatively designed, optional form that models at least one good approach would be a useful catalyst for institutions to review their practices in light of their students’ needs.

Are colleges trying to kill the Pell Grant program? It sounds like an absurd question. But after reading the results of a recent survey that Inside Higher Ed conducted of nearly 500 college admissions directors, we think it's a fair one to ask.

As readers of Higher Ed Watch well know, the Pell Grant program is in the midst of a major budget crisis. The White House and Congress have struggled mightily over the last two years to try to keep the current $5,550 maximum Pell Grant in place. And the program’s funding problems are only going to get  more severe at the end of the 2013 fiscal year, when the supplemental Pell Grant funds that Congress provided in this summer’s budget ceiling legislation run out.

Obama administration officials and the program’s supporters in Congress have been willing to sacrifice many student benefits they have previously supported (with the latest victim expected to be the interest subsidy payments that the government makes on federally subsidized loans during the six-month period after students leave college) because they remain committed to the program’s core mission: eliminating the cost barriers that all too often keep low-income students from attending college.

But do the nation’s public and private four-year college leaders share this commitment? They certainly say they do. The results of the IHE survey, however, suggest that many of them are just paying it lip service.

[Last week at Higher Ed Watch, student aid expert Mark Kantrowitz explained why he believes the government needs to set mandatory standards for the financial aid award letters colleges send out each spring. Today, he offers his recommendations for what those standards should look like.]

By Mark Kantrowitz

Financial aid award letters need to be standardized both to protect the best interests of students and their families and to make them easier to understand and compare. Existing voluntary standards have proven to be inadequate to the task.

But what would these mandatory standards look like? To make these award letters more useful to students and their parents, colleges should be required to:

• Include Clear and Correct Information about College Costs

Every award letter should disclose the total cost of attendance, the total amount of gift aid (money that doesn’t need to be repaid, such as grants and scholarships), and the out-of-pocket cost (the difference between the cost of attendance and gift aid) for which students and their families are responsible. This information should appear prominently on the first page of the financial aid award letter in a standard location and format to allow families to comparison shop.

[The U.S. Department of Education is holding a public meeting today to discuss ways to improve financial aid award letters. Among those testifying is student aid expert Mark Kantrowitz, who has written extensively on this subject. Today at Higher Ed Watch, Kantrowitz explains why he believes the federal government needs to set mandatory standards for these letters. In a future post, he will offer his recommendations for what those standards should look like.]

By Mark Kantrowitz

The letters that colleges send students to alert them of their financial aid awards should be focused primarily on the needs of students and their families. Students and their families need and want clear, correct, complete, and comparable college cost and financial aid disclosures when they are deciding which school is the best fit. Unfortunately, most colleges’ award letters do not currently satisfy these needs.

All too often, in fact, colleges send award letters to prospective students that understate costs they’ll incur at the institution; overstate the generosity of the financial aid packages they offer; and obscure or misrepresent the true bottom-line price they will have to pay.

But why would colleges send award letters that are so misleading? The reason is that many institutions treat the financial aid award letter as a marketing and recruiting document, not a counseling tool. The goal from the college’s perspective is to make the college seem more affordable than it is. Colleges often accomplish this by obscuring the difference between loans and grants, which can lead to over-borrowing. In such cases, the design of the financial aid award letter is driven by the college’s pecuniary interests and not the student’s best interests.

Financial aid award letters need to be standardized both to protect the best interests of students and their families and to make them easier to understand and compare.

The debt ceiling legislation that Congress approved this month provided a one-time infusion of $17 billion for the Pell Grant program, spread between fiscal years 2012 and 2013. But as we’ve previously reported, the program is not out of the woods yet. Congressional appropriators still need to find at least another $1.3 billion to maintain the current maximum grant of $5,550 in the 2012 fiscal year, which starts in October.

Finding the money to cover this gap may not be as difficult as it seems. President Obama has offered a proposal that would not only provide the bulk of the savings needed but would also be of great help to millions of student loan borrowers. Unfortunately, the student loan industry’s Republican friends in Congress may stand in the way of this common-sense proposal.