Pell Grant Funding Deal Ends Student Loan Benefit… Temporarily

Congress is finally poised to vote on an omnibus spending bill that covers multiple federal agencies and finalizes fiscal year 2012 funding for the U.S. Department of Education. The bill, which is posted on the House Rules Committee’s website here, is expected to pass. As we wrote earlier this week, the pending omnibus bill funds the Pell Grant program at a maximum grant of $5,550 in part by tweaking  eligibility rules for the program and by reallocating subsidies for student loans.  That latter provision was part of a Senate proposal floated earlier this year and has undergone a rather odd mutation in the final bill.

Specifically, the provision ends the interest-free benefit on Subsidized Stafford loans during an undergraduate borrower’s six-month grace period after leaving school. This change produces savings that the pending bill then reallocates (spends) to Pell Grants in 2012 and subsequent years. The version proposed by Senate Democrats earlier this year would have permanently ended that benefit on all newly issued loans, generating some $2.9 billion in savings over five years and $6.1 billion over ten years. All of those savings would have been allocated to Pell Grants, though not all in 2012. 

The provision in the omnibus appropriations bill Congress is set to vote on also ends the grace period interest benefit, but only for loans issued between July 1, 2012 and July 1, 2014. Loans issued after those dates would again qualify for the benefit. A temporary repeal of the benefit saves only about half as much over five years as a permanent repeal and saves nothing in later years. Subsequently, it allows for less spending to be reallocated to Pell Grants.

From a student’s point of view, the pending change is likely to sow a bit more confusion in an already-confusing set of loan terms and repayment rules. For example, a borrower who begins a four-year program in 2012 and borrows only Subsidized Stafford loans will have some loans that qualify for the 6-month grace period benefit and some that do not.

Some observers will defend the temporary repeal of the interest-free benefit as a way to get just enough savings to shore of the Pell Grant program in the near term without reducing student loan benefits any more than necessary in future years. In other words, the policy is meant to take only what is immediately needed. It’s also likely that the Senate proposed to repeal the interest benefit reluctantly earlier this year, and probably felt it had to pull back from a full repeal after conceding to the House on some Pell Grant eligibility changes in the final omnibus bill.

Regardless of the negotiating strategy, or how the short term funding compromises stacked up, the temporary repeal is bad policy. Congress should either leave it as is, and find savings to support Pell Grants elsewhere, or repeal it permanently. Besides, Congress is going to need all of the savings from a permanent repeal, and then some, when the temporary emergency funding for Pell Grants (including the 2009 stimulus, the 2010 Student Aid and Fiscal Responsibility Act, the repeal of year-round Pell Grants, and the 2011 Budget Control Act) finally comes to an end.

In 2014, Congress will need to appropriate some $31 billion to maintain the maximum Pell grant. That will make this year’s heroic effort to appropriate $22.5 billion feel like a very light lift. Congress should do what it can now to shore up the Pell Grant program for the long term.