Debt Ceiling Law Provides $17 Billion for Pell and Ends Grad Student Loan Interest Subsidy

After months of intense deficit reduction negotiations, both chambers of Congress passed and President Obama signed into law the Budget Control Act of 2011 just hours before the U.S. defaulted on its debt. The House passed the bill Monday with a 269-to-161 vote, and the Senate voted 74-26 Tuesday to pass the $2.4 trillion debt-ceiling bill. President Obama signed the bill shortly after the Senate vote. The package contains three main provisions related to student aid:

  • Additional mandatory funding for the Pell Grant program for fiscal years (FY) 2012 and 2013
  • Elimination of the in-school loan interest subsidy for graduate and professional students
  • Elimination of Direct Loan repayment incentives

The package represents a bipartisan compromise between congressional leaders, and will reduce the nation's debt through a two-stage process, while simultaneously raising the debt limit so that the U.S. does not default on its current obligations. 

Stage One: Nearly $1 Trillion in Deficit Reduction; $900 Billion Debt Ceiling Increase

The first stage of the plan includes approximately $1 trillion in deficit reduction through the establishment of ten-year spending caps.  In addition, the plan gives the President the authority to immediately raise the debt ceiling by $400 billion, which the Treasury Department estimates will last through September 2011. Another $500 billion debt limit increase would be subject to resolutions of disapproval votes in both the House and Senate. The disapproval measure would be subject to Presidential Veto. A vote of disapproval would still permit the president to raise the debt limit but also allow members of Congress to go on record as disapproving the measure.

Stage Two: Joint Committee Tasked With Legislating $1.5 Trillion in Deficit Reduction, Paired With Additional Debt Ceiling Increase 

A joint, bipartisan committee, made up of 12 members (6 from both the House and the Senate, equally divided between Democrats and Republicans) will be tasked with developing legislation to achieve at least $1.5 trillion in future deficit reduction by Thanksgiving. The committee's legislation, which can include entitlements and revenues, must be voted upon by December  23 . 

If the Committee's recommendations achieve at least $1.5 trillion in savings and are enacted by Congress, the debt ceiling will be raised by $1.5 trillion. If the committee's bill is enacted and produces between $1.2 trillion and $1.5 trillion, the debt limit will be raised dollar-for-dollar. Regardless of the amount of the debt limit increase, it would be subject to a disapproval vote which would, in turn, be subject to a Presidential Veto. 

The bill puts enforcement measures in place if the committee fails to produce a bill or Congress fails to enact it, or if it produces less than $1.2 trillion in deficit reduction. 

  1. The debt limit will increase by $1.2 trillion, subject to a disapproval vote which would, in turn, be subject to a Presidential Veto.  
  2. Second, there would be across-the-board spending cuts to make up the differential between the deficit reduction achieved by the joint committee and $1.2 trillion, with 50% coming from defense spending, and the remaining 50% coming from non-defense spending, which would include education spending. The spending cuts would apply to FYs 2013-2021, and apply to both discretionary and mandatory spending programs. Only a handful of program - including the Pell Grant program - would be exempt from these cuts. 

As part of the compromise, both the House and Senate agree to vote on a balanced budget constitutional amendment before the end of the year. The plan does not tie future debt limit increases on the outcome of that vote. 

Impact on Student Aid Funding

  • 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.

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. 

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