The Real Looming Pell Grant Shortfall

It would be understandable if news of the impending multi-billion dollar shortfall in the Pell Grant program made recipients nervous about whether they will get the same level of federal support next school year. But low-income students who receive these awards have no need to worry — the political stakes are too high for lawmakers to be stingy. We are confident that Congress will do all that it can to provide the dollars needed now to ensure that Pell Grant award levels remain at least at current levels next year.

Maintaining the grants will require substantial amounts of effort and resources from lawmakers. But keeping Pell Grants whole in the immediate future isn’t the biggest challenge Congress will have to face. As we have noted previously, an even more daunting Pell Grant shortfall is looming in the future when the mandatory funds that are currently being used to boost the maximum award run out. While lawmakers may be motivated to “fix” Pell in the short term, it is unlikely that fundamental reform and expansion — of Pell and the other federal student aid programs — is on the near horizon.

So what accounts for the impending shortfall in the Pell Grant program? One cause is the downturn in the economy, which has helped lead to an unexpected surge in demand for the grants. According to the U.S. Department of Education’s budget chief, 800,000 more students have applied for student aid this year than last, and a significant share of these applicants (about 41 percent) come from families making less than $30,000. In addition, Congress significantly expanded eligibility for Pell Grants last year when it made changes to the needs analysis formula as part of the College Cost Reduction and Access Act (CCRAA). These changes not only expanded the number of students eligible to receive the grants, but also qualified many current recipients for larger awards.

The net result is a gap of about $5.9 billion between the funds allotted for Pell Grants in fiscal year 2008 and the amount that is expected to be needed to keep the maximum award constant for the 2009-10 school year.

Congress has already begun trying to head off the current shortfall. Last week, lawmakers included an additional $2.5 billion for the program as part of “a continuing resolution” it passed as a stopgap measure to keep the government operating until final fiscal year 2009 appropriations bills are approved. Once the continuing resolution expires, appropriators will have to dig even deeper to keep the maximum award at this year’s level of $4,731.

We’re confident lawmakers will come up with the money, because their only option would be to reduce the maximum award — a move that would be stymied by political unpopularity. (Budget rules, meanwhile, will ensure that Congress allocates enough funds to provide the grants at a specified maximum level.) But doing so will have ramifications for other attempts at reform. This is because the budgeting process creates a cap, known as a 302(b) allocation, on how much Congress can spend on a particular appropriations bill. This spending ceiling creates a zero-sum game in which increases for a particular program must be met by decreases elsewhere in the same appropriations bill to stay under the cap.

An increase of several billion dollars for Pell Grants therefore means that Congress will have less money to spend on other education programs or reform efforts, and may in fact force cuts. For example, a recent report on redesigning the student aid system suggests phasing out the federal campus-based aid programs, such as College Work Study and the Supplemental Educational Opportunity Grants, and replacing them with a block grant to colleges that would reward institutions that succeed in retaining and graduating low- and moderate income students. But what if Congress cuts these programs to meet the Pell shortfall? You can’t improve the use of aid dollars you no longer have.

As bad as the current shortfall may seem, it’s nothing compared to the one looming in the 2013 fiscal year. When Congress passed the CCRAA last year, it included mandatory money derived from cuts to lender subsidies to boost the Pell Grant over a series of years, culminating with $5.1 billion in 2012 to raise the maximum award by $1,090. But in order to accomplish this and still meet budgetary requirements, the legislation provides just $105 million in mandatory money the following year. This means that Congress will again face the tough choice of either substantially decreasing the Pell Grant or shelling out at least $9 billion more to keep the maximum award constant (this earlier post explains the situation in greater detail). Such a gap could very well restrict all other education spending expansions that year, not to mention cutbacks and other freezes in other agencies in the same appropriations bill.

Congress certainly has tough choices to make about balancing its Pell priorities in the next few years. Unfortunately, the shortfall it’s facing now will be little more than a fire drill compared to the five-alarm blaze looming in 2013. In the meantime, policymakers will have to go to extraordinary lengths if they want to do anything more than just keep us running in place in terms of making college more accessible and affordable.