To Maintain $5,550 Maximum Pell, Obama's FY2012 Budget Proposes Cuts to Other Aid Programs

President Obama's fiscal year (FY) 2012 Budget Request would maintain the $5,550 maximum Pell Grant award for 2012-13 by modifying federal student aid programs to save $100 billion over the next decade. 

"The fiscal realities we face require hard choices," Obama said in a statement to Congress. "But in an increasingly competitive world in which jobs and businesses are mobile, we also have a responsibility to invest in those things that are absolutely critical … To get there, we are making college more affordable for millions of students, through the extension of the American Opportunity Tax Cut and maintaining our historic expansion of the Pell Grant program while putting it on firm financial footing. "

The major provisions of the President's FY2012 Budget Request are detailed below.

The Pell Grant Program

The administration projects that the Pell Grant program will face a $20 billion shortfall for academic year 2012-13.  The cost of the Pell Grant program has ballooned in recent years due to growing enrollment, greater financial need, broadened eligibility standards, higher awards, and the introduction of second Pell Grants in a single award year.  If the administration took no action to address the shortfall, the maximum grant could have been reduced to $3,240 (a loss of $2,310) for 2012-13. 

The Obama administration proposes two major changes to sustain the Pell Grant program and keep the $5,550 maximum award.  First, the administration proposes to revoke access to second scheduled awards within an award year (often referred to as "year-round Pell") for the 2011-12 year.  The most recent projections of the overall cost of two Pell Grant awards in a single award year is more than 10 times its original estimate, without clear evidence that it is meaningfully accelerating students’ degree completion, according to the administration.  Eliminating the second scheduled Pell Grant award in an award year would save an estimated $8 billion in 2012; these funds would be directed toward maintaining the maximum $5,550 award. 

Note that elimination of the statutory authority for two Pells in an award year would not affect the new regulatory rules that mandate assignment of a crossover period to the year that results in the higher payment (if ISIRs from both years are available), or reassignment based on subsequent receipt of additional information. At this time, the U.S. Department of Education has given no indication that it will revise crossover assignment rules. Elimination of second scheduled Pell Grants in an award year would return us to a situation where Pell will be available to students for a summer period only if they had not utilized their full scheduled award in the previous fall through spring timeframe, or if summer Pell is paid from the upcoming year’s scheduled award. Payment from the upcoming year potentially leaves the student short of Pell funds during the upcoming spring payment period, as has been the case in the past. Unlike past policy, however, schools no longer have control over the year to which a summer crossover period would be assigned.

The second proposal to ensure a maximum $5,550 Pell Grant is to eliminate the Stafford loan subsidy for graduate students.  This is projected to save $2 billion and these funds would be directly transferred to the Pell Grant program.  These subsidies are not well targeted and do not have an effect on encouraging more students to enroll in graduate school, according to the administration.  

Perkins Loan Program 

The Obama administration’s proposal to restructure the Perkins Loan Program contains similar language to last year's proposal to establish a Direct Perkins Loan program. The proposal would increase the interest rate to 6.8 percent and eliminate interest subsidies. This would create an estimated $6.8 billion in budget savings that would be used to fund Pell Grants, according to budget estimates. Loan funds for the program would be increased from $1 billion to $8.5 billion a year to provide loans to an estimated 3 million students. Once the new Perkins program is up and running revolving funds would be returned to the Department as students repay their loans.  

Allow Borrowers with Split Loans to Simplify Servicing

Many students have loans with both FFEL loan servicers and Direct Loan servicers.  The administration would provide a financial incentive for borrowers to place their FFEL debt and servicing with the Department of Education where they would have single servicing. This would not be the same as loan consolidation. Doing so would reduce confusion and defaults, and would also generate more than $2 billion in savings in FY 2012 that would be put toward the Pell Grant program.

IRS to FAFSA Data Transfer and Verification

The administration hopes to cut down on improper Pell awards by enhancing the IRS-to-FAFSA data transfer and using IRS data to verify FAFSA information. Department of Education analyses shows that the Pell Grant program has an approximate improper payment rate of 3 percent resulting from incorrectly reported income, amounting to over $400 million in net overpayments.  Enhanced IRS data transfer and verification is expected to yield $340 million in 2012 by reducing improper Pell payments. 

Beginning with aid awards disbursed in the 2012-13 academic year, the Department of Education would implement an enhanced verification process that would rely on a combination of the existing, but further enhanced, IRS data retrieval tools and revised requirements for the verification process performed by financial aid administrators.  Applicants who have already filed their taxes when they complete their FAFSA would be required to use the IRS data retrieval process to automatically populate the FAFSA.   Applicants who file their taxes after they have filed their FAFSA would be asked to update their FAFSAs with IRS data.  Most applicants who are selected for verification would be required to correct their FAFSA with IRS data or provide their school with an IRS-approved transcript of their tax data instead of simply a copy of their tax return.

In addition, the FY2012 Budget Request would:

  • extend the American Opportunity Tax Credit;
  • provide funding at FY2010 levels for 2012-13 Federal Work-Study (FWS),  Federal Supplemental Educational Opportunity Grant (FSEOG), and  Gaining Early Awareness and Readiness for Undergraduate Programs (GEAR UP);
  • eliminate the Leveraging Educational Assistance Partnership (LEAP) program;
  • provide a small increase for the Federal TRIO programs to make up for expiring mandatory funding;
  • replace the TEACH Grant program by creating a scholarship program for talented young people to become teachers that requires states to strengthen their teacher preparation programs;  and
  • provide $1.25 billion over five years to reward states and institutions that help more students earn degrees.

Importantly, the President's budget proposal, while significant, is just the first step in a lengthy and complex budget process.  More information about the President's FY2012 budget request for education can be found on the Department of Education's website

Yesterday, NASFAA President Justin Draeger released a statement on the President's Obama's budget proposal: 

"Eliminating subsidized Stafford loans for graduate students and two Pell Grants in an award year will undeniably negatively impact students, but maintaining funding for the Pell program, which could be facing a $20 billion shortfall in FY 2012, is our highest priority. Education spending - and federal student aid in particular - represents a small but vital portion of total federal spending. As lawmakers consider the President's budget, we encourage them to remember that federal student aid is a direct investment in the American people and helps bolster the competitiveness of our underserved populations."

Additional Media Coverage 

Obama’s Budget Proposes a Significant Increase for Schools New York Times 

Obama's Education Budget Would Spare Pell Grants, Increase Spending 11% Overall Washington Post 

Obama Budget Would Boost Education Spending Wall Street Journal