While Pell Grants are treated by Congress and the Department of Education as "entitlements," they have not historically been financed with mandatory funding, but rather are subject to the annual appropriations process. (Legislation enacted in 2007 and modified in 2010 provides mandatory funding for Pell Grants as an add-on to annual appropriations funding.) Providing funding for programs that operate like mandatory spending entitlements through discretionary spending can cause budgeting problems.
For example, when Congress passes the appropriations bill that funds Pell Grants, it does not yet know how much the program will cost. This is because the appropriations bill provides Pell Grant funding for the upcoming academic year, which begins nearly a full year after the Pell Grant money becomes available. Congress can only rely on estimates of how many students might receive Pell Grants in the upcoming academic year and the resulting cost. If these estimates prove wrong, the program could have insufficient funds to cover the grants for which students are eligible under the law.
Beginning in 2001, it became common practice for Congress to knowingly pass an appropriations bill that did not provide sufficient funds to cover the program’s costs based on estimates provided by the Department of Education. Subsequently, the Pell Grant program would run a shortfall because all eligible Pell Grant recipients were "entitled" to aid. To make the program work for students, the Department of Education began borrowing funds from the most recently enacted appropriations bill -- which is supposed to provide Pell Grant funding for the next academic year -- to cover the shortfalls occurring in the current academic year.
Congress failed for five years in a row to adequately fund the Pell Grant starting in 2001, resulting in cumulative shortfalls of $4.3 billion, or about a third of the whole Pell Grant appropriation. If the shortfalls were allowed to accumulate for much longer, they would ultimately have prevented students from receiving the Pell Grant amount for which they were eligible. To prevent this occurrence, in fiscal-year 2006, with a one-time payment, the Pell Grant shortfall was paid off by Congress.
To prevent the Pell Grant shortfall phenomenon from reoccurring, President George W. Bush proposed and Congress adopted a new spending policy in fiscal year 2006. The new rule charges, or "scores," the appropriations bill with jurisdiction over education spending for the full cost (as estimated by the Congressional Budget Office) of providing Pell Grants. If the appropriations bill provides less money than is necessary to fund all Pell Grants in the upcoming fiscal year, it is still charged with spending the full amount, which counts against the Committee’s 302(b) allocation.
In other words, the committee does not have an incentive to provide less than the estimated full amount that is needed. It cannot, as was possible in the past, intentionally underfund the Pell Grant program and spend the money on something else. The rule also charges the appropriations subcommittee in the next fiscal year with any shortfall in Pell Grant spending that occurs because the estimated and appropriated amount was insufficient to cover the actual cost of the grants. Similarly, the appropriations subcommittee receives a credit towards its 302(b) allocation in the next fiscal year if the estimated and appropriated amount was more than enough to fund the grants in the prior year.