Big Budget Cuts Proposed for Student Aid: Is Your Grant Safe?

Last Updated Feb 14, 2011 2:25 PM EST

Email your legislator, if you're counting on federal Pell Grants to help you start, or continue, your higher education. The GOP proposes to slash your award by about 15 percent for academic year starting this September. That would be the largest cut in aid in the history of the program. President Obama opposes the change but his new budget, presented today, shows that he has other cuts in mind. Students face an uncertain period while the contending forces fight it out.

Pell Grants go to students from families with low to moderate earnings. There's no precise income cut-off, but about 97 percent of the money goes to those who earn under $50,000 a year. Almost 40 percent is awarded to those earning $20,000 or less. Some 60 percent of the recipients are independent -- mostly men and women 24 and older, the majority with children of their own, who depend on themselves, not their parents, to pay for their educations. They're seeking degrees they skipped when they were younger, upgrading their skills, or switching careers.

The maximum Pell already announced for the current year is $5,550, for the lowest earners. The GOP would effectively drop it to $4,705, a reduction of $845.

Every $100 change in the maximum Pell corresponds to about 200,000 recipients, says Mark Kantrowitz, publisher of The GOP's proposed reduction, if passed, would cut 1.7 million students out of the program, he says. That's about one-fifth of those currently receiving aid. The remaining students would have their grants severely slashed.

Kantrowitz estimates that the GOP's cuts would reduce the number of moderate- and lower-income students receiving bachelor's degrees by about 61,000. "We're in a brains race, not an arms race, and we're falling behind" he says. "Our main resources are people and we're not investing in them. China graduates more engineers in one year than we do in six."

Making matters worse, the GOP would eliminate two other programs geared toward helping students with the lowest incomes: The Federal Supplemental Educational Opportunity Grant and LEAP (Leveraging Educational Assistance Partnerships), which provides states with matching money for their own grant programs. The poorer you are, the more you'd lose. Here's the outlook:

1. Full Pell grants: Probably saved this year. President Obama holds the veto pen and intends to keep Pells at the promised $5,550 this year. He hasn't ruled out supporting FSEOG, either. But to find the money, he's planning other cuts in aid. He might need a second round of reductions if he hopes to hold Pells at their current level next year, too.

2. Pell Grants for summer school: Probably out. Starting in 2010, students were able to get two Pells a year -- one for the spring semester and another one for summer school -- to speed them toward a degree. Costs, however, have soared. A program estimated at $400 million is already costing $4 billion, says Terry Hartle, senior vice president for the American Council on Education. The president wants to press "pause" on the second Pell, to find out if the money is being well spent.

3. State grants to students: Probably down. Like the GOP, Obama will not fund LEAP. States will lose their matching grants. "We already expected significant reductions in state support for higher education this year," Hartle says. "Now there will be less generous student aid, as well." Hartle says. At least 43 states have cut their education budgets since the recession began. The College Board reports that tuition and fees at community colleges rose an average of 6 percent in the 2010-2011 academic year, on top of 7.3 percent the year before. At four-year public colleges, total costs, including tuition, fees, room, and board, rose 6.1 percent for students living in the state, on top of 5.9 percent the year before.

4. Interest rates on federal loans for advanced degrees: Possibly up. The president want to help fund Pells by reducing the interest rate subsidy given to graduate and professional students (doctors, lawyers) who take federal loans. "That will raise their costs significantly," Hartle says. Congress might call this a tax increase, however, and fight the change.

5. Interest rates on subsidized loans to undergraduates: Probably up in 2012. There's some talk about reducing the subsidy on Stafford student loans this year, Kantrowitz says, but that's not in either party's formal proposals. On July 1, rates will drop to a fixed 3.4 percent -- completing four years of rate cuts authorized by the 2007 College Cost Reduction Act. Unless the law is extended, however, rates on subsidized Staffords will jump to 6.8 percent on July 1, 2012, doubling their cost.

6. Other cuts: Probable. It will take Congressional action to increase interest rates on loans for graduate studies and to stop the summer-semester Pell. That means the aid budget might suffer other cuts, as well. You can count on Congress, however, to keep the tuition tax credits and deductions used mainly by families with middle and upper-middle incomes.

What Parents and Students Should Do
Unless you're rich, file the FAFSA application for federal student aid. The Department of Education will evaluate your income and assets and tell you how much you're expected to pay toward college costs. After that, the schools you've applied to will compare your expected contribution with their own total costs and assemble your aid package, including a Pell if you qualify.

More than 2.3 million students left money on the table by not filing the FAFSA in 2007-2008, Kantrowitz says. They qualified for Pell but skipped the paperwork and didn't collect.

File the FAFSA even if you don't expect any student aid. It gives you access to low-cost federal student loans. Colleges use it parcel out their own aid, too.

Congress is supposed to pass the delayed 2010-2011 federal budget by March 4. If the quarrels continue and the budget is postponed again, you'll have weeks to wait to see if you can afford your tuition this year -- a nasty spot, for school and student alike.

If you're just beginning to look at schools, be aware that the handwriting is on the wall. Grants to qualified students with lower incomes have become a target, not a source of national pride. "There's increased demand for higher education, as people try to equip themselves for the global economy," Hartle says. But you'll have to pay for it with loans. All the more reason to consider a school with a lower cost.

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