What's the Impact of U.S. Budget Control Act on Federal Financial Aid?

August 9, 2011 • Purnell Cropper

President Barack Obama signed the Budget Control Act into law on Aug. 2, 2011. This legislation increased the federal debt ceiling and prevented the U.S. government from defaulting on current financial obligations. NASFAA, the National Association of Student Financial Aid Administrators, has provided a Summary of Key Student Aid Provisions contained within the Budget Control Act. Key highlights include:

• Pell Grants: While many programs faced cuts in this bill, the Pell Grant program was provided with additional mandatory funding for both FY 2012 and 2013. Specifically, the package provides an additional $10 billion in mandatory funds for Pell in FY 2012 and $7 billion for FY 2013, amounts that should come close to preserving a $5,550 maximum award. Even with the additional mandatory funding provided in the debt reduction package, Pell will still face a $1.3 billion dollar shortfall for FY 2012; however, 2011-12 academic year Pell Grants will not be impacted.
• Interest Subsidy for Graduate Students: The Budget Control Act also eliminates the in-school interest subsidy for graduate and professional students effective July 1, 2012, a provision that would save $18.1 billion from FY 2012-21. Again, the elimination of the subsidy goes into effect July 1, 2012. Graduate students may still qualify, based on need, to have a portion of their federal Direct Stafford Loan subsidized for the upcoming 2011-12 year.
• Direct Loan Repayment Incentives: Repayment incentives also were eliminated in the final package. The incentive for using automatic debit repayment provided borrowers with a 0.25 interest rate reduction and the up-front interest rebate incentive was equal to 0.5 percent of the loan amount and applied toward the 1 percent loan origination fee. For PLUS loans, the up-front interest rebate was 1.5 percent applied toward the 4 percent origination fee. Borrowers were able to keep the rebate if they made their first 12 payments on time. The language prohibits the Department of Education from authorizing or providing repayment incentives on new loans disbursed on or after July 1, 2012, except that an interest rate reduction may be provided to a borrower who agrees to automatically debited electronic payments. The elimination of the origination fee rebates is expected to yield $3.6 billion in savings from FY 2012-21.

Together, $17 billion being saved due to the elimination of the graduate and professional in-school interest subsidy and direct loan repayment incentives is being redirected into the Pell Grant program, with the remaining $4.6 going toward deficit reduction. On the positive side, with the exception of the graduate student interest subsidies, federal student aid funding was largely shielded from cuts during this process; however, funding for student aid could be targeted for cuts once again during the second phase of this process when Congress must come up with $1.5 trillion in savings.

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