Jason Delisle on Pell Grants Reforms in the House-Passed Budget

by Reihan Salam

During President Obama’s AP luncheon speech, he made the following observation:

The year after next, nearly 10 million college students would see their financial aid cut by an average of more than $1,000 each.

Those numbers are impressively specific. But are they grounded in reality? How exactly does the Ryan budget proposal change the Pell Grant program? Jason Delisle of the centrist New America Foundation notes that it isn’t entirely clear:

As we wrote last week, congressional budget resolutions are always light on details. At best, lawmakers include vague descriptions of policies that Congress could enact to meet spending goals. That’s exactly what House Republicans did for Pell Grant reforms in the fiscal year 2013 budget resolution that passed the House of Representatives last week. The document offers only a few hints about how lawmakers might fund Pell Grants as the program nears a major funding cliff in fiscal year 2014.

That is, the president’s precise estimate appears to be groundless. But Delisle offers somewhat more rigorous thoughts on the potential implications the proposal:

As part of their sustainability plan, House Republicans would set the maximum grant at $5,550 indefinitely – the same level as in fiscal years 2010 through 2012. That is a major concession over past proposals. House Republicans last year vowed to return the program to its “pre-stimulus” levels (a maximum grant of $4,731 at a cost of $16.2 billion). Congress first set the $5,550 maximum grant level using funds from the 2009 America Recovery and Reinvestment Act. Republican lawmakers have now proposed to fix that “post-stimulus” grant level in perpetuity.

Under current law, the maximum grant is scheduled to rise with inflation for five years starting in fiscal year 2013. The change proposed by the House budget – forgoing the five years of inflationary increases – reduces the cost of the program by about $1.5 billion in 2014 and a bit more each year thereafter based on figures from the Congressional Budget Office’s March 2012 baseline. It’s important to understand that House lawmakers would end the portion of the grant funded as an entitlement (not the portion funded through the appropriations process) to achieve the cost savings.

The entitlement funding source provided $5.0 billion in 2012 when the maximum grant was $5,550. Therefore, we assume that even though the House proposal would end entitlement funding currently in law for Pell Grants, lawmakers would move $5.0 billion each year from that funding source to support the annual appropriation in future years. Therefore, the portion of the entitlement funding that is eliminated by capping the maximum grant is the only actual reduction in program costs ($1.5 billion in 2014) that stems from eliminating the entitlement funding.

Other savings stem from changes House lawmakers would make to eligibility rules for Pell Grants (see this side-by-side). These include eliminating Pell Grants for students attending school less than half time, reducing the individual income threshold that automatically qualifies a student for the maximum grant from $23,000 to $20,000, and limiting grant eligibility to students below an absolute income threshold, though the proposal doesn’t specify what that income level would be. The first two proposals result in minor savings according to previous Congressional Budget Office estimates.

The latter proposal, however, could be the source of major savings depending on where lawmakers set the income ceiling. Current rules don’t set an absolute income limit for Pell Grant recipients. Eligibility is instead determined by a formula that takes income and other factors into account. Data from the U.S. Department of Education show that more than $7 billion in Pell Grants went to families earning incomes of $30,000 and above. For our estimate, we assume the House budget envisions an income cap of $45,000, which we approximate would lower the cost of providing a maximum grant of $5,550 by about $2.5 billion per year.

Finally, we assume that savings generated by the House resolution’s proposal to end the interest-free benefits on Subsidized Stafford loans for undergraduate students would be used to fund Pell Grants. Ending the interest benefit produces large savings according to a Congressional Budget Office estimate released in 2010. It would free up about $4.8 billion annually to be reallocated to Pell Grants indefinitely.

When you add up the reallocated funding and the cost reductions that stem from the proposed eligibility changes, the House proposal would require Congress to appropriate annually about $21 billion. (See table below.) That’s about $9 billion less than what would be needed under current law starting in 2014 and each year thereafter. Furthermore, a $21 billion annual appropriation is in line with what Congress has provided through the regular appropriations process in recent years, bolstering the House Republican’s claim that their plan makes the Pell Grant program “sustainable.”

Essentially, the House-passed budget aims to preserve today’s maximum grant over the long term, yet it also aims to impose cost control on colleges and universities by imposing a tighter cap on the growth of subsidies. In this regard, Ryan might have been inspired by the following remarks:

“We can’t just keep subsidizing skyrocketing tuition,” he said. “We’ll run out of money.” States needed to stop slashing college budgets, he noted, but colleges also had work to do. “So let me put colleges and universities on notice: If you can’t stop tuition from going up, the funding you get from taxpayers will go down.”

Those words were drawn from the president’s State of the Union address, as reported by Kevin Carey in TNR.

A question: if tuition keeps skyrocketing, and if “we run out of money,” would the president see to it that “the funding [colleges and universities] get from taxpayers will go down”? If so, would this be an outrageous assault on “the investments we need to help our economy grow”? Or would it represent a sensible recognition that only by controlling costs can we protect students and taxpayers from higher education institutions that are more interested in extracting subsidies than in offering a high-quality, cost-effective education?

I should stress that I think that federal higher education policy is complicated. I tend to favor a more activist approach, like that endorsed by Carey and others, in which the federal government works to break the power of higher education cartels and to encourage the embrace of specialized instructional providers, open educational resources, and other scalable strategies. But these are policy matters that go well beyond framing a budget. 

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.