Historically, Congress has funded the Pell Grant program entirely through the annual appropriations process whereby lawmakers establish a maximum grant level that a student may receive, and then appropriate as a one-time sum the necessary funding based on that grant amount. Lawmakers must rely on cost estimates because Congress usually appropriates funding for education programs many months before a new school year begins and grants are awarded. This means that Congress can overfund or underfund the Pell Grant program if estimated costs at the time funding is provided are inaccurate. In such cases, the Pell Grant program accumulates a shortfall or a surplus.
A funding shortfall does not, however, force the Department of Education to reduce the grants for which students are eligible. Instead, the Department of Education has made it common practice to borrow funds from the subsequent year’s appropriation to cover a shortfall, and Congress has always appropriated the necessary funds to cover that shortfall. In years that a surplus accumulates, the Department of Education and Congress use the remaining funds to pay for grants in the upcoming school year.
In 2007, Congress passed the College Cost Reduction and Access Act to create a new funding structure for the Pell Grant program that supplements the funding provided in the annual appropriations process. The 2007 law created a 10-year mandatory funding source (i.e. funding not provided through an appropriations bill) for Pell Grants totaling $33.6 billion through fiscal year 2017. The law established a supplemental Pell Grant award for each of the next ten years that would be added to a student’s regular grant award in a given year. In 2008, the first year the program was in effect, each student who was eligible for a Pell Grant of any amount received a uniform supplemental award of $490 under the new mandatory funding.
In 2010, the amount increased to $690. In 2012, had Congress not modified the program, it would have increased to $1,090.
Lawmakers created this new funding structure after making changes to federal student loans that permanently reduced the cost of those programs. Congress opted to reallocate or “spend” those cost savings on the Pell Grant program. However, lawmakers did not want those funds to supplant annual appropriations that Congress would make in the future for Pell Grants, so they structured the new funding as a supplement to the annual appropriations.
Congress changed the mandatory funding stream for the Pell Grant program in the Health Care and Education Reconciliation Act of 2010. The law ended subsidies for private lenders making federally-backed student loans, permanently reducing the cost of the loan program again. Similar to 2007, Congress opted to reallocate or “spend” those cost savings on the Pell Grant program.
That 2010 law maintains a similar funding structure to the one created in 2007 – it uses mandatory funding to support a supplemental award for all Pell Grant recipients. However, the law awards the supplemental grants in the same manner as the portion of the grant funded through appropriations, not as a uniform add-on. The law limits the supplemental grants to $690 per recipient until 2013, at which point the supplemental award increases annually until 2017 to account for inflation. Beginning in 2018, grants will no longer increase with inflation. Unlike the 2007 law, the 2010 law does not cap the mandatory funding available for the supplemental grant. The program can draw on as much funding as is needed to provide the supplemental funding each year and Congress does not need to provide an appropriation for this funding. It is important to note that under the current funding arrangement Congress established for Pell Grants in 2010, the majority of the grant is still funded annually through an appropriations bill. For the 2014-2015 school year, mandatory funding is expected to comprise $870 of the maximum $5,730 Pell Grant. The balance of $4,860 in each year is funded through an annual appropriations bill.
In 2008 and 2009, both the number of Pell Grant recipients and the cost of the program rose rapidly. This growth can be attributed to a combination of large increases in college enrollment and Pell Grant applications, the effect of a weak economy on applicants’ incomes and grant eligibility, broader eligibility rules that Congress passed in 2007 and 2008, and a substantial increase in the maximum grant that Congress included in the American Recovery and Reinvestment Act of 2009 (the economic stimulus bill).
Specifically, for the school years 2008-09 and 2009-10, the number of students receiving a Pell Grant increased by 13 percent and 27 percent, respectively. By comparison, increases in the four prior years never exceeded five percent. An estimated 8.7 million students are expected to receive Pell Grants in 2014, compared to nearly half as many (5.2 million) as received the award in 2006. These increases occurred at the same time changes to eligibility rules that Congress passed in 2007 and 2008 took effect. Those changes, which were included in the College Cost Reduction and Access Act of 2007 and the Higher Education Opportunity Act of 2008, increased the amount and types of income excluded from the Pell Grant eligibility formula, increased the income level under which an applicant automatically qualified for a maximum grant, and allowed students to receive more than one Pell Grant if they attended school year-round. Finally, as part of the American Recovery and Reinvestment Act, Congress approved a $619 increase in the maximum grant in 2009 and pledged to provide an $819 increase for 2010, compared to the maximum in 2008 of $4,731.
Taken together, these factors sent the cost of the Pell Grant program to its peak of $35.8 billion in fiscal-year 2010, up from $14.7 billion in 2007. Recent increases in the cost of the program have had a lasting effect, particularly as Congress and the Obama Administration have aimed to maintain the maximum grant level of $5,550 in fiscal years 2011 and 2012, a level that was first achieved in 2010 partly by using temporary funds from the American Recovery and Reinvestment Act of 2009, and to increase the maximum grant level to $5,645 in fiscal year 2013 and $5,730 the following year. However, Congress has not increased the annual appropriation for the Pell Grant program sufficiently to support the program’s higher costs. Instead, since 2010 lawmakers have allocated supplemental funding outside the appropriations process and changed eligibility rules for the program to reduce its costs and maintain a maximum grant of $5,550.
In 2010, Congress provided $13.5 billion in supplemental funding for Pell Grants as part of the Health Care and Education Reconciliation Act, funding that was offset by student loan reforms in that law. In 2011, Congress provided $3.2 billion in supplemental funding and reduced the costs of the program simultaneously by eliminating the year-round Pell Grant eligibility that was established in 2008. Again in 2011, Congress provided supplemental funding of $17 billion that would help fund the program in 2011, 2012 and 2013 as part of the Budget Control Act. Those funds were made available (“offset”) by a provision in the law that eliminated Subsidized Stafford loans for graduate students beginning in mid-2012. Finally, a fiscal-year 2012 appropriations bill repealed and modified eligibility changes made in 2007 and 2008 to reduce the cost of the Pell Grant program and provided supplemental funding by temporarily suspending the grace period interest benefit on Subsidized Stafford loans for undergraduate borrowers for two years.
In 2013, the Congressional Budget Office reported that the Pell Grant funding Congress provided in recent years was more than enough to cover the costs of the program. The costs of the program in recent years proved to be lower than what the budget office originally projected. That led to an accumulated surplus in the program totaling $9.8 billion. The budget office later revised that figure to $11.0 billion in its preliminary 2014 estimate.
The surplus allows Congress to fund the Pell Grant program with the same appropriation it provided in 2013 for fiscal years 2014 through 2017 without the need for additional supplemental funding or eligibility changes. An accounting rule allows lawmakers to roll prior year funding that was unused and apply it to a future year’s funding.
Beginning in fiscal-year 2018 and each year thereafter, however, the funding challenges for the Pell Grant program remain, although the most recent Congressional Budget Office estimates show a smaller funding gap that lawmakers will need address if they are to maintain the program at its current benefit level and eligibility rules. For example, the 2018 appropriation must include an increase of $2.3 billion, and Congress must sustain that higher level of funding and provide further increases each year thereafter.