Breaking News: New CBO Estimate Says Student Loan Savings Same, Pell Grant Costs Explode

Last week Higher Ed Watch raised the possibility that new Congressional Budget Office estimates released on Tuesday could complicate the fate of a major student aid bill pending in Congress. With the release of the new estimates — the January baseline — and CBO correspondence to a few select Congressional staff, it looks like we were half right. Projected costs for a Pell Grant entitlement funding stream that the House passed last fall have exploded compared to earlier estimates, but savings projected from a switch to 100 percent direct lending are virtually unchanged.

We thought that the loan program savings might be less under the more recent estimate given that many schools have already switched from the Federal Family Education Loan program to direct lending. Perhaps that fact has not affected the new estimate, or is offset, but until CBO distributes more detailed information, we won’t know what underlying factors have and have not changed since last March.

On the other hand, we did get the Pell Grant story right. Pell Grant funding in the House bill will now cost $56 billion over 10 years, not the originally estimated $39 billion, thanks to greater student enrollment and higher inflation expectations. That would eat up a lot more of the $87 billion in savings created by doing away with private lender subsidies in the Federal Family Education Loan program.

As is common practice, however, official spending and savings estimates that the Senate will use for any student aid bill that moves in the chamber in the coming months will likely reflect CBO’s March 2009 baseline, not the recently released January 2010 numbers. But as we pointed out last week, the Senate Budget Committee chairman could break with precedent and use the most up-to-date estimates. Republicans (and maybe a few self-described Democratic budget hawks) will surely wince at the ever rising Pell Grant costs and cry foul if the Senate goes with the lower number.

In the face of rising Pell Grant costs, the Obama administration and Congress may have to dial back their spending ambitions. If Democrats want to ensure the kind of Pell Grant increases they are promising, they might want to consider putting all direct loan savings toward the program. After all, that’s more in line with what President Obama proposed a year ago.