News Flash: Student Loan Subsidy Savings Could Go to Deficit Reduction, Not Pell Grants

Yesterday Vice President Biden kicked off a series of meetings with members of Congress aimed at producing a bi-partisan deficit reduction bill. Many Republicans—and a growing number of Democrats—want such a bill passed in tandem with an increase in the national debt ceiling. The debt ceiling needs to be raised in the coming weeks. According to the Washington Post, House Budget Committee Chairman Paul Ryan (R-WI) says the elimination of the in-school interest subsidy for federal student loans for graduate students (known as Subsidized Stafford loans) is on a “menu” of proposals that could be part of any bipartisan agreement on deficit reduction paired with an increase in the debt ceiling. That’s not going to please supporters of the Pell Grant program.

Congress needs to come up with $34.2 billion in the fiscal year 2012 appropriations bill to maintain the current maximum Pell Grant of $5,550 for the 2012-13 academic year. That’s an enormous sum considering the recently-enacted fiscal year 2011 bill provided $23 billion.

In his budget request released in February, President Obama, proposed eliminating the in-school interest subsidy on federal student loans for graduate students and diverting the savings to the Pell Grant program. Currently, federal loans don’t accrue interest for lower income undergraduate and graduate students while they attend school. If lawmakers used the savings that result from ending that benefit to supplement the annual Pell Grant appropriation, as the president proposed (the Congressional Budget Office estimates the savings at $8.2 billion over 5 years), Congress won’t need to make such a large appropriation to maintain the maximum grant of $5,550. In other words, Congressional appropriators would face a less daunting task in funding the Pell Grant at $26 billion instead of $34.2 billion.

If, however, the elimination of the in-school interest benefit finds its way into a deficit reduction bill that Congress passes in the coming weeks, those savings cannot be used to shore up the Pell Grant program during the fiscal year 2012 appropriations process. Put another way, eliminating the in-school interest benefit now would reduce federal spending, which reduces the deficit. Doing it through a deficit reduction bill, rather than in a spending bill, would preclude Congress from using those savings to support Pell Grants. That would make a cut to maximum grant of $5,550 almost certain in the coming year’s appropriation.

Budget cutters and deficit hawks point out that the proposal to end the in-school interest subsidy on federal student loans is “on the table” because President Obama included it in his budget request. But is it really on the table? The President offered the savings up as a way to funnel more money into Pell Grants—not as a way to reduce spending. So the question is: Will the Obama Administration and its congressional allies tell the budget cutters and deficit hawks that eliminating the in-school interest subsidy is “off the table” for deficit reduction?