Is the Battle Over the Student Loan Subsidy for Graduate Students Already Over?

The in-school interest subsidy on federal student loans for graduate students has been on the chopping block before. But college lobbyists and student advocacy groups have always managed to save it.

This year, though, with all the budget cutting fervor on Capitol Hill, the question no longer seems to be whether this popular benefit for financially needy students will be eliminated but how the money saved from doing so will be spent. Will it go to shoring up the Pell Grant program, as President Obama has proposed, or to deficit reduction, as House Republican budget cutters are advocating?

This question is coming to a head as the White House and Congress seek to come to agreement on a deficit-reduction package that could potentially be passed in tandem with an increase in the national debt ceiling. As we reported on Friday, House Budget Committee Chairman Paul Ryan (R-WI) told reporters last week that ending the in-school interest subsidy for graduate students is “on the menu” of proposals being considered in these budget talks.

It’s difficult to believe, however, that that Obama administration would agree to include this in the deficit-reduction package, considering how pivotal this proposal is to the president’s plan for maintaining the maximum Pell Grant at its current level of $5,550.

As readers of Higher Ed Watch well know, the Pell Grant program is facing a serious budget crisis even as demand for the grants continues to escalate. This is primarily because short term funding sources that helped boost the maximum Pell Grant in recent years (such as through the stimulus legislation and last year’s student loan reform bill)  will be all used up. According to the Congressional Budget Office, Congress needs to come up with $34.2 billion in the fiscal 2012 appropriations bill just to keep the maximum Pell award where it is. That’s going to be an enormous challenge, as the recently-enacted fiscal year 2011 bill provided $23 billion.

Over the last couple of months, higher education researchers, student aid experts, and even college lobbyists have suggested a variety of ideas for tweaking the program to produce savings, such as tightening the eligibility criteria for obtaining the awards and reducing the amount of the time students can receive the grants, from nine years to six years. But the truth is that these ideas alone are unlikely to reduce the costs of the program enough to achieve the desired result.

In contrast, the CBO estimates that ending the interest subsidy for graduate students would produce $8.2 billion in savings over five years — all of which could be used to supplement the Pell Grant appropriation in 2012. In other words, appropriators would have the less difficult task of coming up with $26 billion instead of $34.2 billion to keep the maximum grant in place for the 2012-13 academic year.

All of this is of little concern to House Republican leaders, as they are pushing for substantial cuts in the maximum Pell Grant award. They argue that that the administration’s approach of looking for mandatory savings to supplement appropriations in order to keep the maximum Pell Grant at its current level for another year is simply another short-term solution that will guarantee that the program remains “on an unsustainable path.”

When it comes to the in-school interest subsidy on student loans, the House Republican budget cutters are taking a different approach. In a report accompanying the budget resolution they pushed through the House last month, these lawmakers called for eliminating the subsidy for both undergraduate and graduate students, and devoting the savings entirely to reducing the deficit — just as the President Obama’s own National Commission on Fiscal Responsibility and Reform proposed last year.

For their part, college lobbyists are not ready to concede defeat yet. After all, they have successfully fended off similar efforts in the past.

In 1995, the higher education associations helped lead the fight against a budget-cutting plan offered by the newly-empowered House Republicans that would have eliminated the interest subsidy for all student loan borrowers. Facing fierce opposition to the plan, GOP lawmakers at first tried to scale it back, by proposing to block only graduate and professional students from receiving the benefit. But ultimately, the college groups — working hand-in-hand with the Clinton administration, Democratic lawmakers and students — forced them to abandon the proposal altogether.

In 2009, the threat came from the opposite side of the aisle. Rep. George Miller, the California Democrat in charge of the House education committee at the time, created a furor when he included a provision in the initial version of a student loan reform bill that would have eliminated the interest subsidy on federal loans for graduate and professional students and diverted the savings to other student aid programs. Under pressure from college lobbyists and advocates for graduate students, Miller quickly reversed course and removed the offending provision from the legislation before the measure even came up for a vote in the committee.

Still, the college lobbying groups acknowledge that the Pell Grant program’s budget problems have complicated the debate, making it difficult for them to draw as firm a line in the sand. In a letter last month to the U.S. Department of Education, officials with the American Council on Education offered a potential compromise — saying that they could accept a partial roll back of the benefit for graduate students as long as the subsidy remains in place “for at least two years of graduate study” and that the savings is “reinvested back into the Pell Grant Program.”

But given the pace at which budget cutting negotiations are proceeding, and the level of savings each side is looking to generate, college lobbyists might want to ask themselves whether it’s worth continuing to fight what is increasingly looking like a losing battle. Because at this point they may just be better off refocusing their efforts on trying to ensure that the Obama administration remains firm in its commitment to protect the Pell Grant program from the budget ax.