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Eye on Washington: Can We Afford the Pell Grant Program?



The Pell Grant program is the centerpiece of federal efforts to boost low- and middle-income student participation in higher education. The program enjoys bipartisan popularity: Democrats like it because the benefits flow heavily to the lower and lower-middle income families and Republicans support it because it is a voucher that puts the money in the hands of students. Recently, the program gained renewed attention as a key component in achieving President Obama’s goal of having America lead the world in degree attainment by 2020.
Moreover, a large number of students depend on the program: In the 2010–11 academic year, the Department of Education estimates that nearly 8.5 million Americans—about 44 percent of all college students—will receive Pell Grant awards.
But the program faces a serious challenge. As Table 1 shows, the number of individuals receiving a Pell Grant has increased sharply over the last several years and this, along with a significantly higher maximum award, has dramatically boosted the federal cost of the program.
To put it in the simplest terms, this single program now costs more than the entire budget of eight cabinet agencies, and is the largest single program in the Departments of Health and Human Services, Education, and Labor. Given widespread concern with the federal budget deficit, it is not a good sign that the cost of this vital and venerable program is increasing so rapidly.
The Pell Grant program has a unique structure. Like Social Security, it is an entitlement to individuals; a student who is financially eligible is guaranteed to receive an award. But unlike Social Security, where the benefit is established in law, the size of a student’s Pell Grant depends on the amount of money that Congress votes to provide every year.

The key calculation is the sum needed to provide a maximum grant at a specific level. In other words: How much will it cost to provide a $5,550 maximum award in academic year 2010-11? The higher the maximum grant, the more money is required. In a tight budget year, one way for Congress to minimize expenditures is to hold the maximum award at the same level as the previous year or—heaven forbid—to reduce it.

Here’s how it works. In February 2011, President Obama will submit his budget for fiscal 2012, which starts on October 1, 2011. In that document, he will estimate how many students will receive an award, recommend a maximum grant for the 2012–13 academic year, and tell Congress how much it will cost to fund such a maximum award. In other words, more than 18 months before the start of the school year, the president must estimate how much Pell will cost. Regardless of how close to the start of the academic year it is calculated, the estimated cost of running the Pell Grant always differs from the actual cost. Even after the school year starts, the Department of Education may need less money to run the program than expected (producing a surplus) or it may cost more (creating the dreaded “Pell Grant shortfall”). Shortfalls must be made up the next federal fiscal year.
And, as of August 2010, the Pell Grant shortfall (the result of more recipients than anticipated in the 2009–10 academic year) stands at $5.7 billion. This sum will be added to the estimated cost of providing a $5,550 maximum award in the coming academic year. This means that the total federal cost of the program in 2010–11 will be the nearly $33 billion shown in Table 1, plus the $5.7 billion shortfall, or more than $38 billion total, an increase of 196 percent in just five years. If Congress doesn’t provide at least this much money, the maximum award will fall—something that has happened only three times in the almost 40-year history of the program.
In addition to surging college enrollments, the cost of the Pell program has soared in recent years because Democrats have significantly boosted the maximum award. In early 2009, as part of the ARRA Act (better known as the economic stimulus law), Congress put $17.035 billion aside for Pell Grants to temporarily raise the maximum award by $500 for academic years 2008–09 and 2009–10.
Shortly after the stimulus was enacted, the president proposed to boost the size of the Pell Grant even further by eliminating the bank-based federal student loan program and making all schools use Federal Direct Lending. The savings from this change (estimated at the time to be roughly $87 billion) were to be used to make the temporary increases permanent and to raise the maximum award at a rate of the Consumer Price Index (CPI) plus 1 percent in each of the next 10 years. Under the president’s proposal, the administration estimated that the maximum award would rise to $7,250 by 2020. While most colleges and universities participated in (and preferred) the bank-based student loan program, the prospect of steady, real growth in the maximum Pell award was enough to secure higher education’s support for the president’s proposal.
After almost a year of consideration, President Obama’s student loan proposal was enacted in March 2010 as part of the Health Care and Education Affordability Reconciliation Act of 2010. Unfortunately, by the time Congress approved the change, the savings from moving to Direct Lending had diminished and— thanks to higher than expected college enrollments—the cost of providing the proposed award had soared. Moreover, some of the savings from killing the student loan program were needed to help finance health care reform.
So when the smoke cleared, Congress agreed to make the temporary increases permanent and keep the maximum award at the $5,550 level for the next three years. Starting in fiscal 2013, Congress promised to raise the maximum award by an amount equal to the CPI. As Table 2 shows, this means that the anticipated $7,250 maximum award in academic year 2020–21 is now—best case scenario—expected to be worth roughly $5,975. Rather than the real growth in the maximum award the president promised, it is now likely that the real value of the maximum Pell award will actually fall, even if (again, best case scenario) Congress follows through on its promises.
The title of this article asks a rhetorical question. The federal government certainly can afford to continue funding Pell Grants. The uncertainty stems from the rapid and unprecedented growth in the program, as illustrated in Table 1. After all, $40 billion is a huge amount of money, but it is a small fraction of the total federal budget. The real question is, will Congress continue to make this essential investment in America’s future? An explosive growth in the cost of the program, recent suggestions that some schools may be committing fraud with federal student aid funds, and an overwhelming desire to exert control over federal spending mean that we cannot take it for granted that Congress will continue to support this critical program in the near future as it has in the recent past. Stay tuned.
​Terry W. Hartle is senior vice president of ACE’s Division of Government & Public Affairs.