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.
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. 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.
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.
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.
Congress should make sure a program is working before expanding it. This budget provision restores the program to its original intent.
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.” 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. The College Board’s Rethinking Student Aid study group also has argued for “eliminating the distinction between subsidized and unsubsidized Stafford loans.”
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.,
The administration also recommended the elimination of interest subsidies for graduate students in its fiscal year 2012 budget. This proposal became law as part of the Budget Control Act.
In addition, the Consolidated Appropriations Act of 2012 eliminated interest subsidies during the six-month “grace period” after graduation.
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.