Debt Ceiling Agreement a Mixed Blessing for Education Programs

article | August 01, 2011

Last night congressional leaders and President Obama reached an agreement on legislation to raise the federal debt limit. The bill—which could pass the House and Senate by Tuesday—also includes limits on federal spending and directs Congress to pass additional legislation to reduce spending by the end of 2011. With respect to federal education programs, the pending bill looks most like the proposal that House Speaker John Boehner released last week. (Ed Money Watch detailed the competing proposals in a post last week.)

The pending bill would cap annual appropriations funding for 10 years and enforce the caps through “sequestration.” The caps are divided between security and nonsecurity programs. The sequestration rule would require federal agencies to implement across-the-board spending cuts should Congress and the president enact a bill that spends more than the caps allow. A similar arrangement was in place through much of the 1990s. The Pell Grant program is exempt from any cuts under a sequester.

Overall, the caps would cut appropriations spending for fiscal year 2012 by $7 billion and then allow for gradual increases each subsequent year. (See table below.) As we wrote a few weeks ago, these spending caps will put pressure on the federal education budget, as nearly all education programs are funded through the annual appropriations process.

The pending debt ceiling bill is a mixed blessing for the Pell Grant program. It provides a one-time infusion of $17 billion for the program, spread between fiscal years 2012 and 2013. To offset the cost of the supplemental funding for the Pell Grant program, the pending debt ceiling bill ends the “in-school interest subsidy” on subsidized Stafford loans for graduate and professional students. The bill also produces additional savings by ending on-time repayment incentives for student loan borrowers beginning with loans issued after July 2012.

Keep in mind that Congress still needs to provide the regular 2012 appropriation for the Pell Grant program in the coming months. While the supplemental funding makes that an easier task, the cap on discretionary spending creates a new kind of budgetary headwind. To maintain the current maximum grant of $5,550, Congress needs to appropriate $24.2 billion—an increase of $1.3 billion from the current year level—but the new cap on annual appropriations reduces total spending in 2012 compared to 2011. In other words, Congress will have to find additional funding for Pell Grants while reducing appropriations spending overall.

The debt ceiling bill also sets up a joint House-Senate committee to draft legislation that would further reduce federal spending by $1.5 trillion over 10 years. The bill would get fast-track treatment in the House and Senate and must be signed into law by January 15, 2012. To enforce this provision, the bill would require that the Office of Management and Budget use sequestration to cut entitlement programs in 2013 should Congress and the president fail to meet the specified savings targets. Additionally, in the event of a sequester, Congress would be subject to even lower caps on appropriations spending in future years. While Pell Grants would be exempted from cuts under sequestration, lower spending caps would certainly squeeze the program in future years.

Such across-the-board cuts would also affect student loans. The law requires that the federal government increase origination fees on all student loans to reduce the costs of the programs under a sequester, should Congress and the president fail to enact legislation to reduce federal spending by $1.5 trillion over 10 years. 

We’ll have more on the pending debt ceiling bill as new information becomes available.