Pell Grant Shortfall Remains a Threat

Pell Grant costs will exceed new funding over the next decade, based on the latest Congressional Budget Office (CBO) baseline, depleting nearly all the program’s reserves by the end of the decade in our base case and running out of reserves as soon as 2027 under alternative scenarios.

Although the Pell Grant shortfall now appears to be much smaller than we previously estimated – thanks in part to recent Congressional action and issues with the Free Application for Federal Student Aid (FAFSA) process – funding remains scarce. Using data from the Congressional Budget Office (CBO), we estimate:

• Pell Grant costs will exceed appropriations over the next decade, reducing the $11 billion of reserves to only $1 billion by 2034 under our base case.
• Under alternative scenarios where costs grow faster and/or funding is more constrained, the Pell Grant program will run out of reserves between 2027 and 2029.
• Under those alternative scenarios, the Pell Grant program will face an $11 billion to $63 billion ten-year shortfall, net of current reserves.

In 2024, the discretionary portion of Pell Grant program is estimated to cost about $24.5 billion, funded with $22.5 billion of appropriations, $1.2 billion of mandatory dollars, and $0.8 billion of reserves. The 2024 cost represents a $1.1 billion (4.5 percent) reduction from 2023, resulting from a 1 percent (90,000 person) reduction in enrollment relative to 2023 and an 8 percent (490,000 person) reduction relative to CBO’s prior projections.

Because much of this reduction is likely due to the problematic rollout of the new federal financial aid application, CBO expects enrollment to ultimately recover – increasing costs from $24.5 billion in 2024 to $28.4 billion in 2034, assuming no increase in the maximum benefit. Under this scenario – assuming funding grows by 1% in 2025 and then with inflation – costs will exceed funding and draw down all but $1 billion of the Pell Grant reserves by the end of the decade.¹  Reserves would completely disappear, if not for the $3.4 billion of mandatory funding Congress recently diverted to support the Pell Grant program.

Importantly, the actual shortfall could be much larger. Our base scenario assumes the Pell Grant award remain flat. If the maximum Pell Grant award grows with inflation (historically it has increased by at least that much), reserves will be exhausted by 2028 and costs will rise to $36 billion by 2034, leaving a $38 billion cumulative shortfall.

Our base scenario also assumes stable funding, despite the fact the Fiscal Responsibility Act (FRA) calls for a 5 percent cut to non-defense discretionary spending in 2025 relative to 2024 levels. Assuming that cut is applied proportionally to Pell funding, reserves would run out by 2029, leaving a $11 billon cumulative shortfall.

If awards are inflation indexed and the 5 percent FRA cuts are applied, Pell Grant reserves will be exhausted by 2027 and the program would face a $51 billion cumulative shortfall.

Although the combination of a boost in mandatory funding and problematic FAFSA rollout have improved the near-term financial state of the Pell Grant program, the program’s finances remain tenuous. While it will be tempting for lawmakers to raid the surplus reserves or expand Pell Grant benefits, our projections suggest this would be a mistake. At best, the Pell reserves will be virtually depleted within a decade under current projections. Under other likely scenarios, funding could run out far sooner.

Rather than raid the Pell surplus or expand benefits to lower-value priorities, Congress should shore up the current Pell Grant program and work to improve college costs, quality, transparency, and accountability.