CBO Takes a Look at the Pell Grant Program

Today, the Congressional Budget Office released a new report on Pell Grants which details the program and recent changes made to it, shows options to reform it, and possible alternatives to the existing program. Pell Grants are the largest of the federal governments' grant programs for higher education and are the primary channel for federal financial aid besides federal student loans. Eligibility is determined by a formula called the expected family contribution (EFC), and also determines the size of the grant, based on course load.

In the 2011-2012 school year, the most recent in which CBO has data available, the federal government spent $33.6 billion on grants for 9.4 million students. That is a 158 percent increase in spending since 2006-2007, after adjusting for inflation. The expansion is a result of a number of factors. The recession increased the number of beneficiaries as workers attempted to acquire new skills and caused many more to be eligible as households faced losses in income and assets. Policymakers have also played a role, as changes in eligibility requirements allowed for more potential recipients. Lawmakers also increased the size of the maximum grant to $5,645 today, from $4,050 in 2006, accounting for about one-third of the increase in spending.

Pell Grants are funded by both mandatory funding and discretionary appropriations. The stimulus bill of 2009 appropriated funding for the expansion of the Pell Grant program, which was replaced by a mandatory appropriation after the stimulus funds were exhausted. However, projected grant spending exceeds the projected appropriations for Pell Grant program, creating a nearly $50 billion shortfall through 2023.

With that in mind, the table below shows a few possible options to reform the program.

^{Source: CRFB calcualtions based on annual CBO numbers multiplied by ten.}

Particularly useful in the CBO report is a summary table presenting the arguments for and against each of the above options; showing the tradeoffs policymakers should consider. For instance, CBO argues that tightening academic requirements for continuing eligibility could encourage students to study harder, but could also affect some students that have a temporary setback. It should be noted that the options have considerable overlap and interative affects. For example CBO estimates that reducing the Expected Family Contribution (EFC, a measure of a family's financial resources) ceiling to zero, tightening the academic requirement for both initial and continuing eligibility, and implementing all of the Grant reductions together would save $20 billion over ten years. In addition, CBO presents four alternatives to the Pell Grant program - forgivable loans, grant commitments to middle and high school students, supplements to the state's grant programs, and occupational training grants - and provides a overview of the positives and negatives for each.

We've shown before that compared to higher education tax expenditures, Pell Grants are better targeted in that they direct most of their benefits to lower income households. However, it is less clear what effect Pell Grants have on encouraging lower income students to attend college, or if they just reduce the financial burden for students that would have done so regardless. Even in the latter case, CBO suggests that by easing the burden, Pell Grants might allow for better student performance.

While policymakers could address the Pell Grant shortfall through changes to the program, a number of plans have found savings in other areas. The Bipartisan Path Forward was able to address the shortfall by finding higher education savings from reforms to student loan programs, including eliminating the in-school interest subsidy for subsidized Stafford loans. Alternatively, the New America Foundation's Education Policy Program chose to eliminate many higher education tax expenditures, and enact some student loan reforms in order to finance an expansion of the Pell Grant program.

With the current shortfall needed to be addressed soon, lawmakers might consider many of the options CBO puts forward. The most recent President's Budget addressed the shortfall, but real action will be needed soon if current grants are to be continued. In the ongoing discussions on higher education reforms, the Pell Grant program cannot be ignored.

Click here to read the full report from CBO.