Political outlook for the Pell Grant and other federal college aid

by Grace

Next year the Pell Grant program will face a $5.7 billion shortfall and interest rates on federally subsidized students loans are scheduled to double to 6.8%.  Given the pressure to curtail overall government spending, it’s prudent to expect changes in federal college aid programs.

Sequestration  – The Pell Grant is protected from first-year cuts, but all federal student loan programs would be cut by 8.2% if no agreement is reached to avert the fiscal cliff.

Student loans  —  Several options have been discussed, including doing away with the subsidy but lowering interest rates by tying them to U.S. Treasuries.  For the purpose of targeting lower-income students, it has been argued that the recently enhanced income-based repayment program does a more effective job than loan subsidies.

Pell Grant  —  A push to overhaul Pell grants has come from various directions, with a common perspective that they need to become more efficient and effective.  Some ideas are to use the grants as an incentive for higher college completion rates and increased state aid for low-income students.

A fuller discussion of the issues can be found at What’s Next for the Pell Grant? (Inside Higher Ed).

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Does the government make a profit from student loans?

From What’s Next for the Pell Grant? (Inside Higher Ed), this caught my attention:

Even subsidized loans are a moneymaker for the federal government under the current accounting system, notes Sarah Flanagan, vice president for government relations and policy at the National Association of Independent Colleges and Universities.

But this is contested by a spokesperson for the Democrat-controlled Senate Committee on Health, Education, Pensions and Labor in a PolitiFact piece:

Subsidized loans do not make money for the government, Sessions said. They actually cost the federal government money.

An explanation of how student loans are a money-maker from This Can’t Be Happening:

Inflation, according to the government’s own statistics, is running at 2.7%. In other words, the government, which is the lender in the case of Stafford Loans, is already making 0.7% on its “subsidized” loans to undergraduates. And the inflation rate has been considerably lower in prior years, so the government has actually been making out like a bandit longer term. If it were to start earning 6.8% on these loans, like it’s already making on older loans, unsubsudized Stafford loans and Perkins Loans, the Treasury would be raking in huge profits on a loan program which is supposed to be helping make college affordable for lower income and middle-income students.

And this from the Minneapolis Star Tribune:

Now, the possibility that the federal government actually makes money on student loans may sound wildly improbable. Over the last several months we’ve heard repeatedly that keeping interest rates at the current level of 3.4 percent will “cost” the federal government $6 billion. Republicans want to pay for the reduced interest rates by trimming spending from health programs. Democrats want to go after tax breaks for businesses.

But the truth is that taxpayers do quite well by the student loan business. If you think about it just a little, it’s not hard to figure out why: The U.S. government pays almost nothing to borrow money that it lends out to college students at much higher interest rates. The current interest rate on a subsidized Stafford loan is 3.4 percent; on an unsubsidized Stafford loan the interest rate is 6.8 percent.

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