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Ten Higher Education Budget Questions for Obama

Published:  February 15, 2011

By New America's Education Policy Team

Yesterday, President Obama released a budget request for the 2012 fiscal year that would make some significant changes to the federal student aid programs, primarily to shore up funding for the Pell Grants and to discourage students from taking out high-cost private student loans. The plan also includes new investments in programs that aim to push colleges to improve the rates at which their students graduate, as well as to promote reform throughout higher education.

As we do each year, we have come up with some key questions that we believe policymakers, the news media, and the public should ask in evaluating these proposals:

1. To help pay for the president's plan to maintain a maximum Pell Grant award of $5,550, the president's proposed budget would end the year-round Pell Grant policy that lets students collect two grants in a single award year with the second grant generally used to pay for summer school. The proposal would reduce costs in the program by $3.4 billion in fiscal year 2011 and by $4.2 billion in fiscal year 2012. The administration argues that there is little evidence that year-round grants help students earn degrees faster -- which was the goal of the policy when it was included in the Higher Education Opportunity Act in 2008. Given that the year-round Pell policy has only been in existence for a few years, is it premature to say that the program is not working? What evidence does the administration have that students are not completing programs and earning degrees faster?

2. In proposing to eliminate year-round Pell Grants, the administration has provided little information about which colleges benefit the most from the policy. Are for-profit colleges the biggest beneficiaries? And if so, does the administration have any evidence that this money has been misused?

3. The president’s budget request would also eliminate the “in-school interest subsidy” on federal student loans for graduate and professional students, saving $13.3 billion over five years and $29.3 billion over ten years. The savings would be used to shore up Pell Grants. Most federal student loans accrue interest while students attend school, but a subset of loans -- those made to graduate and undergraduate students who have lower incomes (or whose families have lower incomes in the case of undergraduate students) -- do not accrue interest until after students leave school. The president’s proposal would end this benefit for graduate students arguing that it does not encourage students to attend graduate school, is not well-targeted to borrowers who need extra repayment help, and is unnecessary because of other loan repayment and forgiveness benefits available on federal loans. These arguments seem to apply just as well to the in-school interest subsidy for undergraduate students. Why did the administration propose eliminating the benefit on these grounds for graduate students but opt to maintain it for undergraduate students? Are the policy’s weaknesses only applicable to graduate students?

4. Considering that Congress has struggled over the last year to find the money to keep the maximum Pell Grant at $5,550 in fiscal year 2011, is there any guarantee that the changes the president has proposed in his budget request will put the Pell Grant on "a sustainable fiscal path"? Or will the administration have to come back next year with other suggested reforms? Also, is the administration still confident that the maximum award will reach $5,975 by 2017, as is called for in the student loan reform legislation Congress passed last year?

5. The president proposes to convert the Perkins Loan program into a new direct loan program and expand the available loans to $8.5 billion. The existing program operates as a revolving loan pool at institutions of higher education that includes capital contributions from both schools and the federal government. The Obama administration estimates that the new program – under which the U.S. Department of Education will make loans directly to students – will earn the federal government $4.9 billion over five years and $7.4 billion over ten years. How does this program “earn” money for the federal government if it makes subsidized loans to colleges students? The Congressional Budget Office has identified an accounting loophole that makes federal loan programs appear to earn a profit for the government when they in fact do not. Are the earnings from the Perkins Loan proposal calculated using this loophole?

6. For the past two years, lobbying groups for the higher education industry have been less than enthusiastic about the administration’s Perkins Loan program proposal, which has appeared in some form in all three of the administration’s annual budget requests. Does the administration have any reason to believe that it will receive more support for the plan this year? If so, does the Department of Education believe it has more leverage now because the proposal’s projected earnings would be used to help prop up the Pell Grant program, which is in dire financial straits, and/or because it would prevent the existing Perkins Loan program from expiring as scheduled in 2014?

7. The campus-based aid programs -- Federal Work Study, Perkins Loans, and Supplemental Educational Opportunity Grants (SEOG) -- are intended to assist low-income students with college expenses. The federal government provides campus-based aid funds to postsecondary institutions, which then award them to their students. However, the formula the government uses to distribute the aid overwhelmingly benefits elite public and private colleges and universities, even though these institutions serve a relatively small proportion of low-income students. The administration has criticized this formula and proposes changing it for the Perkins Loan program. However, the president's 2012 budget request would leave the formula unchanged for the SEOG and work study programs. As we previously asked, does the administration plan to address this discrepancy in the future?

8. According to the administration, there are currently over six million borrowers who have taken out student loans through both the now-defunct Federal Family Education Loan (FFEL) program and the Department of Education's Direct Lending program. To make repayment easier for these borrowers, the president's budget request seeks to encourage them to convert their remaining FFEL debt into Direct Loans by reducing their loan balance by up to 2 percent. The administration says that this proposal would generate about $2 billion in savings that would be reinvested in the Pell Grant program. But couldn't the government save even more money if the Education Department offered the same benefit to all FFEL borrowers? Has the administration considered that possibility? And if not, why not?

9. The president’s budget request would replace the TEACH Grant program with a new Presidential Teaching Fellows grant program for states. The new program would provide $185 million a year for scholarships to talented students in successful teacher education programs to states that agree to measure the performance of their teaching institutions, hold less successful programs accountable, and improve licensure and certification standards. Research shows that under the current TEACH Grant program, many eligible students do not receive grants. Some students cannot access the grants because the schools they attend do not participate in the program or require them to take preliminary courses before entering teacher training programs. Others choose not to take the grant in case they are unable to fulfill the employment requirements, in which case the grant turns into a loan. Did these shortcomings prompt the administration to propose replacing the program with its new proposal? Are there other reasons why the administration wants to effectively end the TEACH Grant program?

10. The President's budget provides nearly $125 million for a "First in the World" initiative dedicated to identifying and expanding successful strategies to improve college completion and higher education productivity. Under the guise of improving productivity and increasing completion is the Administration also exploring policies and programs that are designed to control, curtail or cut the current cost of tuition as a means to ensure that students with potential aren't dropping out of school simply because they can't afford to pay their bills?

We hope these questions are helpful. Of course, given the divided Congress, there's a bigger one that needs to be asked: Will any of these proposals ever be enacted?

For all of the New America Foundation's Federal Education Budget Project questions on President Obama's fiscal 2011 budget request, click here. And don't miss FEBP's follow-up document, Summary and Analysis of President Obama's Education Budget Request for Fiscal Year 2012.

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