[The following was provided by Nancy Merz, Director of UMKC’s Financial Aid and Scholarships Office.]

Below is an overview of the impact that the Debt Reduction Bill, a federal bill passed by Congress and signed by President Obama last week, will have on Student Aid Funding, including Pell Grants, interest on subsidies for graduate students, and direct loan repayment incentives.

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. 

When the President released his budget in February, Pell faced a projected $20 billion shortfall for FY 2012. The elimination of the Year-Round Pell Grant in the final FY 2011 budget bill reduced this shortfall to $11 billion. 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.

Interest Subsidy for Graduate Students: The Budget Control Act also eliminates the in-school interest subsidy for graduate and professional students beginning July 1, 2012, a provision that would save $18.1 billion from FY 2012-21, $8.2 billion of which is from FY 2012-16, according to the Congressional Budget Office (CBO). The legislative language clarifies that the subsidy elimination does not apply to students taking preparatory coursework and those in programs leading to teacher certification where the credential is awarded by the state instead of the institution.

Direct Loan Repayment Incentives: Repayment incentives were also 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 CBO projects the elimination of the origination fee rebates would yield $3.6 billion from FY 2012-21.

Summary

Together, the elimination of the graduate and professional in-school interest subsidy and direct loan repayment incentives yield a savings of $21.6 billion. In total, $17 billion of that is being redirected into the Pell Grant program, with the remaining $4.6 going toward deficit reduction.

Contextually speaking, with the exception of the graduate student interest subsidies, 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 the joint congressional committee must come up with an additional $1.5 trillion in savings.