Suggestions for the Stimulus: Student Financial Assistance

Earlier today, Higher Ed Watch offered our recommendations for how Congress should resolve differences between the U.S. House of Representatives and Senate stimulus packages over legislative provisions that would send money directly to states so they can help their higher education systems weather the fiscal crisis. In this post, we will weigh in with our suggestions for how lawmakers should resolve the legislative differences in the student aid proposals.

Pell Grants

Fighting over: Funding levels, the maximum award, and which funding stream should receive money
The conference fight over Pell Grants is not just about funding, but which program funding should receive new money. Pell Grants are currently funded from both discretionary appropriations and a separate mandatory funding stream created by the College Cost Reduction and Access Act of 2007 (CCRAA). The discretionary money is used to determine the maximum award level and what size grant students should receive. These grants are calculated in such a way that increases in discretionary funding that raise the maximum award make additional students at higher income levels eligible to receive the minimum grant award of $400. The result is that any money appropriated is spread over a larger number of students, resulting in smaller awards for all. All of the money in the Senate bill goes toward the discretionary stream.

This is not true of the CCRAA funding stream. That pool of money is distributed equally among current Pell recipients after their maximum award is calculated, bumping up each recipient’s funding. For example, in fiscal year 2008 there was $2.03 billion in mandatory money available, which was used to provide $490 for each of the millions of students who already received Pell Grants. No additional students gained eligibility as a result of this infusion of funds. Part of the House bill’s Pell money goes toward the CCRA funding stream, while the vast majority goes to the discretionary funding stream.

Therefore, the conference committee will have to make a fundamental choice: Is it more important to use the stimulus bill to expand the pool of recipients (who will receive grants of $400 each) by allocating funds to the discretionary stream or provide current recipients with a substantially more generous award through larger approprations to the CCRAA funding stream?

These are obviously difficult issues. But we believe lawmakers can maximize the effect of their efforts by significantly increasing the maximum awards of current recipients, especially those with the greatest financial need.

Loan Limit Increases

Fight over: Making students eligible for an additional $2,000 in unsubsidized Stafford loans
The House bill would increase by $2,000 the amount students can borrow in unsubsidized federal student loans each year for the next two years. The Senate version would keep the current loan limits in place.

We think it would be a big mistake to load additional debt on students who can ill afford it, especially given the tough economic times that still lie ahead. Instead of continually raising loan limits, policymakers need to confront the tuition crisis head on, because it is forcing all but the most affluent to take on heavy debt loads to attend a four-year college. Raising loan limits for the second time in a year will simply exacerbate the problem by allowing high-cost colleges an excuse to continue raising their prices, and put off the tough decisions.

Lender Subsidy Rate Change

Fight over: Changing the way student lender subsidies are calculated for last quarter
The House bill included a provision to change the way the quarterly subsidy for all loans issued since 2000 paid to lenders under the Federal Family Education Loan (FFEL) program is calculated for the fourth quarter of 2008. In a conference call with the press late last month, Rep. George Miller, the California Democrat in charge of the House Committee on Education and Labor, said this provision was included at the behest of the Bush administration to keep the market open for lenders.

We believe this change should not be adopted for several reasons. First, the Department of Education has already instituted its own change in the subsidy calculation that should fix the problems in the subsidy rate calculation that had concerned lenders. Second, this change would likely cost substantially more than the Congressional Budget Office’s $10 million estimate — making it a hidden expense in the bill. Finally, Congress has already enacted several programs as part of the Ensuring Continued Access to Student Loans Act (ECASLA) that help keep FFEL lenders in business. A better funding priority would be to approve the House bill’s allocation of $50 million to help the Department of Education administer ECASLA programs.

American Opportunity Tax Credit

Fight over: How much of the credit should be refundable
One of the biggest problems with the existing higher education tax credits is that they are nonrefundable. This means that if you have no tax liability, then you derive no benefit from them. Both House and Senate bills would partially fix this with respect to the Hope Scholarship Tax Credit by temporarily replacing it with the $2,500 American Opportunity Tax Credit. The House bill allows for 40 percent, or $1,000, of the credit to be refundable. The Senate bill provides for only 30 percent, or $750, refundability. This $250 per recipient difference works out to a cost difference of $0.8 billion over 10 years. In fact, the current cost in today’s dollars is even less because the Congressional Budget Office’s tax credit estimates do not reflect that a $1 expense in the future is less costly than $1 spent today.

Since the amount of money involved is not large enough to accomplish much by being redirected elsewhere, we recommend that the conference committee adopt the higher refundable amount. This will make the tax credit more beneficial for lower-income students.