Analysis of President's FY 2006 Budget Request to Congress

This article provides an analysis by NASFAA of the FY 2006 budget request to Congress made by President Bush on February 7. The overall budget request is unusual since it includes increases in a limited number of student aid programs and makes offsetting budget cuts, eliminates programs, and contains revenue raising measures to pay for those increases. The combination of budget cuts and revenue raising measures is more than necessary to pay for the positive aspects of the President's proposal; the differences will go to reducing the federal budget deficit. The proposed budget also makes recommendations for the reauthorization of the Higher Education Act.

The following chart summarizes previous final appropriations figures and the President's FY 2006 (2006-07 award year) budget request for the student aid programs. The FY 2006 goals of the Student Aid Alliancewith which NASFAA works very closely on funding issuesare also included.

*Includes $33 million for proposed Enhanced Pell Grants for State Scholars.

Note that the FFEL and Direct Loan programs are not included in the chart above because they are entitlement programs and the federal costs for these programs are funded from the mandatoryrather than discretionaryportion of the budget.

Summary of Administration FY 2006 Budget with Legislative and Reauthorization Recommended Changes

At the heart of the President's FY 2006 budget request is a novel trade-off that attempts to deal with several issues simultaneously. Those issues include the following:

• the necessity to increase the Federal Pell Grant maximum award that has been frozen for the prior three fiscal years at $4,050;

• the elimination of a $4.3 billion Pell Grant funding shortfall that has accumulated over several years;

• the provision of offsetting budget cuts and revenue raising measures to be used to finance the increase in the maximum Pell Grant and the elimination of the Pell Grant shortfall; and

• the use of such offsetting budget cuts and revenue raising measures in amounts beyond payment for the Pell Grant maximum award increases and elimination of the shortfall to be used for federal deficit reduction.

The President's FY 2006 budget proposes a novel approach to raising the maximum Pell Grant award from its current FY 2005 $4,050 to $4,550 in $100 increments over the next five fiscal years and the elimination of the $4.3 billion Pell Grant shortfall. This would be accomplished by splitting funding for the program into two parts: a discretionary spending base and a mandatory spending add-on. The discretionary spending base would be the normal appropriation process with which we are familiar--the Congress determines the Pell Grant maximum award for a fiscal year and, at least theoretically, provides the funding for that maximum award. The mandatory spending add-on would fund the $100 increase in the Pell Grant maximum and for FY 2006 only provide funding to eliminate the Pell Grant shortfall.

Let's look at the numbers. Again, under the Administration's proposal Pell Grant funding would be split into two accounts. The Congress is asked to provide $13.232 billion in FY 2006 discretionary spending which finances a $4,050 maximum Pell Grant ($33 million of which is for their proposed Enhanced Pell Grant for State Scholars program). But the $100 increase in the maximum award (plus the elimination of the Pell Grant shortfall) would be automatic mandatory spending; this amounts in FY 2006 to $420 million for the $100 maximum award increase and $4.3 billion in shortfall elimination. The following chart illustrates the Administration's FY 2006 Pell Grant proposal.

President's Proposal for Federal Pell Grant FY 2006 Funding (HEA IV-A-1)

Note: Discretionary spending is in a normal font and mandatory spending is in italics.

(a) Pell grants at $4,050 maximum award	$13,199,000,000
(b) Incremental $100 increase in Pell grant maximum award (proposed legislation)	420,000,000
(c) Retirement of current year shortfall (proposed legislation)	4,300,821,000
(d) Enhanced Pell grants for State scholars (proposed legislation)	33,000,000
Subtotal, Discretionary spending,	13,232,000,000
Subtotal, Mandatory spending	4,720,821,000
Total	$17,952,821,000

We are not aware of any other federal program that ever has been financed through a combination of discretionary appropriated funds and mandatory entitlement spending.

In order to fund the mandatory spending for five years worth of $100 Pell Grant maximum award increases, to eliminate the Pell Grant shortfall, and to finance Higher Education Act reauthorization enhancements of student benefits the Administration must, under budgeting rules and its own desire to halve the federal budget deficit in five years, propose a combination of budget cuts and revenue raising measures.

Program Budget Freeze or Eliminations Proposed

To reduce the budget deficit by half in five years and to pay for its Federal Pell Grant proposal, the Administration's budget proposal for FY 2006 freezes spending for the Federal Supplemental Educational Opportunity Grant and Federal Work-Study Programs at their FY 2005 spending levels respectively of $778.720 million and $990.357 million. The Administration would reduce or eliminate 150 programs throughout the government; one-third of the program eliminations come from programs administered by the Department of Education. The President's budget proposal eliminates funding for the following Higher Education Act authorized programs:

Note: programs listed by name and amount of FY 2005 funding scheduled for elimination in FY 2006.

B.J. Stupak Olympic Scholarships	$1.0 million
Byrd Honors Scholarships	40.7 million
Demonstration Projects to Ensure Quality Higher Education for Students with Disabilities	6.9 million
Federal Perkins Loans Cancellations	66.1 million
Gaining Early Awareness & Readiness for Undergraduate Students (GEAR UP)	306.5 million
Interest Subsidy Grants (Facilities)	1.5 million
Leveraging Education Assistance Partnerships (LEAP)	65.6 million
Thurgood Marshall Legal Educational Opportunity Program	3.0 million
TRIO Talent Search	144.9 million
TRIO Upward Bound	312.6 million

In addition to these program eliminations, the Administration is not requesting FY 2006 funds for Perkins Loans Federal Capitol Contributions that amounted to $98.8 million in FY 2004. In FY 2005 the Congress followed the recommendation of the Bush Administration and eliminated Perkins FCC. Consequently, no new Perkins FCC will be available for schools in the upcoming 2005-2006 award year. The Administration also is recommending recalling the federal portion of Perkins Revolving Funds held by schools, arguing, "the Federal share of fundswould better serve students if invested in Pell Grants" and the Administration found "The Perkins Loan program to be duplicative of the larger guaranteed and direct student loan programs." While details of the recall of revolving funds and related matters have not been released the Administration does recommend that "institutions would be reimbursed for their own contributions into Perkins Loan revolving funds as outstanding loans are repaid." The recall of revolving fund monies would be accomplished over the next ten fiscal years as repayments are collected.

In addition to the funding levels described above and to reduce the budget deficit by half in five years and to pay for their Pell Grant proposal, the Administration's budget proposal for FY 2006 makes a number of changes in the Title IV programs. Some of these changes would be implemented as part of the FY 2006 budget if Congress agreed; other changes would be made in the reauthorization of the Higher Education Act, again, if Congress agreed with the proposed changes.

Below we review what the President's FY 2006 budget recommends for several FY 2006 legislative changes concerning its budget and proposals for the reauthorization of the Higher Education Act (HEA).

Legislative Changes in FY 2006 Administration Budget Request

• The President's budget assumes $33 million for Enhanced Pell Grants for State Scholars. The proposal would increase Pell Grants by up to $1,000 for first-year, full-time students who have completed a State Scholars curriculum in high school. Thirteen states currently participate in the State Scholars program. Earlier estimates were that 36,000 individuals would qualify for the State Scholars award. Although this program would operate within the larger Pell Grant Program, total funding will be capped at the $33 million level. If recipients qualify for more than this amount, a process would be developed to allocate awards within the available funding level.

• As part of its package of Pell Grant initiatives, the Administration recommends the following:
  • allow Pell Grant recipients at eligible two- and four-year degree granting schools to receive year-round awards "giving students a more convenient option for accelerating their studies and promptly completing their educations."
  • Limit Pell Grant eligibility to the equivalent of 16 semesters as "a further incentive for timely completion, and to eliminate an area of potential abuse"
  • Eliminate the Pell Grant "tuition sensitivity" rule that "limits the amount of support that students with greatest need receive while attending low-cost institutions."
  • Students now qualifying for a $200 minimum grant actually receive $400 and that would be unchanged in FY 2006 under a proposal to index the minimum award to the maximum Pell Grant award. But in the future the Administration is recommending dollar-for-dollar indexing of increases in the Pell Grant maximum to raising the minimum award. The Administration explains its proposal as follows: "For example, with the $100 increase in the maximum award proposed for 2007, the statutory minimum award would rise to $300 and students qualifying for between $300 and $400 would receive $400. In 2008, a further $100 increase in the maximum award would raise the statutory minimum award to equal the actual minimum payment of $400. In future years, the statutory and actual minimum levels would rise together with the maximum award."

• The President's budget proposes to change the campus-based allocation formula. The Administration states, "The current statutory formulas allocating campus-based funding have historically distributed a disproportionate share of funding to schools that have participated in the program the longest. Since these longstanding participants do not have a higher proportion of needy students than other institutions, these formulas have been identified as inequitable Accordingly, the request proposes to phase in revised allocation formulas beginning in 2006." But, the documents do not state how the allocation formulas will be changed.

• The Administration is proposing to replace the current 7% Federal Work-Study Program community service requirement with a separate set-aside equal to 20% of the FWS appropriation. Its justification for this change is that "while, for the program as a whole, institutions place 15 percent of their students in community service jobs, many institutions fail to meet the 7 percent minimum requirement. Under the proposed approach, institutions would apply for community service funds separately from their regular allocation. Institutions that do not wish to participate in community service activities would not be required to do so and those that do would be awarded additional funds."

• The FY 2006 request includes a public/private partnership to award $100 million per year in grant aid to low-income math and science students. The federal share coming from appropriations is $50 million and the Administration estimates 20,000 Pell-eligible recipients would receive additional awards of $5,000.

• A new short-term training loan program is recommended for FY 2006. The departments of Education and Labor would jointly administer the program aimed at providing participants, who are dislocated, unemployed, transitioning or are older workers or students "to acquire or upgrade specific job-related skills through short-term training programs that are not currently eligible for Federal student aid."

HEA Reauthorization Changes in FY 2006 Administration Budget Request

As part of its budget request, the Administration is proposing a number of HEA reauthorization changes as follows:

• Increase loan limits for first-year borrowers from $2,625 to $3,500, for second-year borrowers from $3,500 to $4,500, and unsubsidized loan limits for graduate and professional students from $10,000 to $12,000, all with corresponding aggregate loan increases.
• Make permanent the expanded loan forgiveness program for qualified math, science, and special education teachers serving in low-income schools. The Taxpayer-Teacher Protection Act of 2004 increased such loan forgiveness from $5,000 to $17,500 for loans made between October 1, 1998 and September 30, 2005. Not affected by this provision are borrowers who have already received loan forgiveness benefits.
• Eliminate the scheduled transition to fixed interest rates for subsidized and unsubsidized Stafford Loans from the current variable interest rate formula. According to the budget summary, the change would allow "students to continue to benefit from projected low interest rates." Under current law, on July 1, 2006 both subsidized and unsubsidized Stafford loans interest rates change from variable rates to fixed interest rates set at 6.8%. It appears that the Administration's proposal is similar to NASFAA's reauthorization recommendation except that NASFAA would cap the maximum interest rate paid for student borrowers at 6.8% whereas the Administration's cap would be 8.25%.
• Standardize extended repayment terms in the FFEL and Direct Loan programs. Currently, FFEL borrowers have restrictions that Direct Loan borrowers do not have in obtaining extended repayment terms for their loans. "The Administration proposed all borrowers have immediate access to extended repayment plans. With rising debt levels, flexible repayment options help students manage their debt and reduce the risk of default."
• Streamline program operations by exempting institutions with cohort default rates of less than 10% from the 30-day delayed loan disbursement requirement and allow such schools to disburse a loan in a single installment for any period of enrollment that is not more than 1 semester, 1 trimester, 1 quarter, or 4 months. (Note: this is a restoration of the statutory provisions that expired on September 30, 2002 and is similar to NASFAA's recommendations.)
• Ensure that only students who committed a drug-related offense while enrolled in higher education be considered ineligible for federal student aid.
• Enhance program stability and assure equal terms for all FFEL borrowers by requiring guaranty agencies to collect a 1% insurance premium on all loans guaranteed or disbursed after October 1, 2006.
• Improve program efficiency. Loans funded with the proceeds of tax-exempt securities originally issued before October 1, 1993, receive substantially higher special allowance payments than are currently paid on other types of loans. ED is proposing to make permanent the one-year moratorium on some of the loans benefiting from this provision.(That moratorium was part of the Taxpayer-Teacher Protection Act of 2004.) The Administration would allow certain of these loans to be "recycled" as was allowed by last year's law.
• Reduce the percentage of federal loans guaranteed against default. For lenders this would mean, "the amount of loan principal insured against default would be reduced from 98 percent to 95 percent. Lenders identified as exceptional performers would have loans insured at 97 percent, and the Secretary would have authority to increase this to 98 percent for lenders that meet certain data quality standards. For most guaranty agencies, reinsurance would decrease to 92 percent from the current 95 percent."
• Reduce from the amount guaranty agencies may retain in their defaulted loan collection activities to 16 cents on every dollar collected from the current 23 cents on a defaulted loan or 18.5 cents on every dollar if the collection is made by consolidating the loan.
• Impose a new 0.25% "annual loan holder fee" to reduce federal subsidies on outstanding balances of non-consolidation loans. The Administration justifies this fee by stating, "Loan holders have increased their financial return through the use of innovative financial instruments, especially through participation in the loan securitization market. The Administration believes the improved efficiency resulting from greater use of private capital markets should lead to lower Federal subsidies. Further, a June 2004 study by the Congressional Budget Office found that lender interest returns on variable-rate student loans are, on average, approximately 0.25 percent above the rate of return guaranteed in the statute."
• Reform consolidation loans by (1) changing the current fixed interest rate to a variable rate; (2) removing all barriers to consolidation or reconsolidation, for example, by allowing a borrower to choose their consolidation lender without current law limitations; (3) charging a 1% origination fee on a reconsolidation loan; 4) increasing the lender fee on new consolidation loans from 0.5% to 1%.
• Repeal the statutory provision requiring 50% of a program's courses to be offered on campus, which the Administration argues limits distance education opportunities.
• Repeal the 90-10 rule that applies to proprietary schools and mandates at least 10% of a school's revenue come from private, non-federal sources.
• In determining federal student aid eligibility, active duty military personnel would be deemed independent.

Total Package Analysis

The Administration's total package of budget recommendations, reforms, offsets, student benefit enhancements, and new programs for FY 2006 spending and Higher Education Act reauthorization would produce $33.8 billion over ten years in mandatory savings; $6.0 billion from the elimination of the Perkins Loan program and $27.8 billion from student loan savings. $8.7 billion of the total amount of these savings would go to student loan borrowers in the form of loan enhancements; $19.3 billion would be spent on the five-year $100 annual increase in the Pell Grant maximum award ($15 billion) and elimination of the $4.3 billion Pell Grant shortfall; and $5.8 billion of the savings would go to the federal government for additional deficit reduction.

Consequently, the $5.8 billion in additional deficit reduction combined with elimination of the $4.3 billion Pell Grant shortfall would result in a total of $10.1 billion over ten years going to deficit reduction for the government instead of that $10.1 billion being utilized to provide Title IV recipients with better student assistance program benefits such as elimination of the student loan origination fee, or increased funding such as an even greater increase in the Pell Grant maximum than $100 per year.

Administration officials emphasize the interrelated nature of their proposal. Financing for the proposed increases in the Pell Grant maximum, elimination of the Pell Grant shortfall, the provision of the various borrower benefits such as increases in first- and second-year student loan limits, and other increased student aid enhancements all are dependent on approval of the budget offsets such as the proposed 16-semester limit on Pell eligibility, the new 0.25% lender fee, the mandated charging of a guaranty fee by guaranty agencies, the recall of Perkins Loan revolving funds, etc. If the financing options are not approved in whole or substituted by other offsets, then the Administration states there would be no increase in the Pell Grant maximum award, the shortfall in that program will not be eliminated, and borrower loan benefits or other such improvements in the Title IV programs would not be increased.

We hope we can persuade Congress to provide increased funding to meet the goals of the Student Aid Alliance. The Administration's FY 2006 budget legislative changes and HEA reauthorization proposals will be considered as part of either the Congressional Budget Resolution and Appropriations processes or during HEA reauthorization.

By Larry Zaglaniczny
NASFAA Director for Congressional Relations

Posted March 14, 2005 on www.NASFAA.org, Web Site of the
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