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Higher Education: A Contrast in Commitment

The House Republican Budget and the Administration’s Empty Promises

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Washington, May 21 | comments

Higher Education in Brief

  • Pell Grants: Maintains the current maximum award ($5,730).

  • Income-Based Repayment: Caps loan payments to 15 percent of discretionary income and forgives loan balance after 25 years.

  • Stafford Loans: Eliminates the subsidy for interest costs that accrue while students are in school.

Pell Grants

  • The House-passed budget maintains the current maximum award ($5,730) for the Pell Grant program.

The Pell Grant program is on an unsustainable course. Costs have skyrocketed in recent years, from $16.1 billion in fiscal year 2008 to an estimated $26.5 billion in fiscal year 2015.[1] And on the current path, the program will face a shortfall in fiscal year 2017.

But the President continues to make promises he can’t keep: His budget doesn’t fully fund Pell past 2018, so the program could face large cuts in grant amounts, eligibility standards, or both in the near future.

By contrast, the House-passed budget maintains the current maximum award, $5,730, for the next ten years and puts Pell on a sustainable path, so students and their families have the security they need to plan for college.

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Income-Based Repayment

  • The House-passed budget caps a borrower’s loan payments to 15 percent of his or her discretionary income and forgives the loan balance after 25 years.

The administration’s current, accelerated income-based-repayment plan caps a borrower’s loan repayments at 10 percent of his or her discretionary income and forgives the loan balance after 20 years.

Just four years ago, Congress made this program more generous, before the program was even three years old—and before it had even shown results. Moreover, the administration’s accelerated expansions could disproportionately benefit high-income borrowers who were graduate and professional students.[2]

Both parties understand the current system is in need of reform: The President’s budget request includes proposals to ensure “high-income, high-balance borrowers pay an equitable share of their earnings as their income rises,” and suggests colleges may be taking advantage of federal loan-repayment programs to increase student debt.[3]

Congress should make sure a program is working before expanding it. This budget provision restores the program to its original intent.

Stafford Loans

  • The budget adopts a modest reform proposed by the President’s Fiscal Commission to eliminate the government subsidy for the interest costs that accrue while students are still in school.[4]

Interest doesn’t accrue on subsidized Stafford loans while a student is in school or deferment. Interest does, however, accrue on unsubsidized Stafford loans.

The President’s Fiscal Commission found there is “no evidence that eliminating in-school interest is critical to [the amount a student owes at the completion of their studies] or to individual matriculation.”[5] And because the subsidy manifests as a lower repayment amount over the duration of the loan, it is in effect yet another (fairly opaque) repayment plan.[6] The College Board’s Rethinking Student Aid study group also has argued for “eliminating the distinction between subsidized and unsubsidized Stafford loans.”[7]

The House-passed budget does not require students to pay interest when they are in school. Rather, federal loans taken out beginning July 1, 2015, would begin accruing interest once they are disbursed, just like unsubsidized Stafford loans today. And like unsubsidized Stafford loans, borrowers would be able to pay the interest that accrued on their loans before they entered repayment if they so chose. Otherwise, the interest would be added to the loan principal, which students would begin to pay back when they entered the repayment period.

The President has tried to limit the in-school interest subsidy in the past.

  • In 2012, the administration proposed to limit the subsidy to 150 percent of program length, and that proposal became law as part of the Moving Ahead for Progress in the 21st Century Act, a transportation bill.[8],[9]

  • The administration also recommended the elimination of interest subsidies for graduate students in its fiscal year 2012 budget.[10] This proposal became law as part of the Budget Control Act.[11]

  • In addition, the Consolidated Appropriations Act of 2012 eliminated interest subsidies during the six-month “grace period” after graduation.[12]

In short, eliminating the in-school interest subsidy is a commonsense reform with bipartisan roots that could put the Stafford Loan program on a more sustainable path.



[2] Jason Delisle and Alex Holt, “Safety Net or Windfall? Examining Changes to Income-Based Repayment for Federal Student Loans,” New America Foundation, October 2012.

[3] Department of Education, “Student Aid Overview Fiscal Year 2015 Budget Request,” Accessed 8 May 2014.

[4] The National Commission on Fiscal Responsibility and Reform, “The Moment of Truth,” December 2010.

[5] Ibid.

[6] Jason Delisle, “Is It Time to End the In-School Interest Subsidy on Student Loans?”, New America Foundation, 11 Nov 2010.

[7] The College Board, “Fulfilling the Commitment: Recommendations for Reforming Federal Student Aid,” The Report from the Rethinking Student Aid Study Group, September 2008.

[9]150% Direct Subsidized Loan Limit: Electronic Announcement #1 — Interim Final Regulations Published,” Federal Student Aid, Information for Federal Aid Professionals, 16 May 2013.

[10] U.S. Department of Education, “Fiscal Year 2012 Budget Summary ― February 14, 2011,” 14 Feb. 2011. 

[11] Katy Hopkins, “Grad Students to Lose Federal Loan Subsidy,” U.S. News & World Report, 13 Mar. 2012.

[12]Changes Made to the Title IV Student Aid Programs by the Recently Enacted Consolidated Appropriations Act, 2012,” Federal Student Aid, Information for Federal Aid Professionals, 18 Jan. 2012.

 

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