Following Latest Projections, Report Indicates Pell Grant Program in Danger of Facing Funding Cliff

By Owen Daugherty, NASFAA Staff Reporter

The Pell Grant program is in danger of running out of money in the next five years, and could face a deficit of roughly $18 billion by 2031, according to a report from the Committee for a Responsible Federal Budget.

The Pell Grant reserve fund swells when appropriations by Congress to the federal aid program exceed the costs of the program. The reserve exists to ensure students receive funding should the program face a funding shortfall, as it did during the Great Recession. 

While the program currently has $12 billion in reserves, and previous projections from the Congressional Budget Office (CBO) estimated the reserve fund could hit $18 billion by the end of the decade, the coronavirus pandemic has upended those figures and projections.

CBO previously projected appropriations to exceed program costs by nearly $1 billion per year, but in the most recent February baseline projections, the CBO noted funding could fall behind by more than $3 billion each year, creating a $31 billion deficit over 10 years that would empty the program’s current reserves by 2026.

However, due to the fact that the Pell Grant program must be funded the year after it falls into deficit, according to the report, the shortfall would never reach $18 billion. The figure is intended to show the cumulative deficit if no changes were made in the interim.

Concerns regarding the reserve fund arose early in the pandemic, with experts pointing to years of stagnant funding and the potential for increased enrollment spelling trouble and leaving the fund vulnerable to depletion. The Pell Grant reserve fund has also been a target for rescission in annual federal budget proposals. In fact, the $150 boost to the maximum Pell Grant for the 2020-21 award year came at the expense of a $500 rescission from the program’s reserve fund.

Now, those fears could become a reality in the near future if Congress isn’t proactive in addressing the issue. The report notes that the deficit is being driven by an increase in recipients and higher costs per recipient, with the CBO projecting a spike in recipients in 2023, which will happen at the same time that changes to the FAFSA and several eligibility modifications regarding who can receive the Pell Grant go into effect.

The same legislation — the Consolidated Appropriations Act, 2021 — modestly increased the maximum award and restored federal financial aid eligibility for incarcerated individuals, also contributing to the number of students who could receive the grant. In total, it is estimated that through the legislation about 550,000 more students will be eligible to receive the Pell Grant and 1.7 million more students will qualify to receive the maximum award each year.

The report also attributes the likely increase in Pell recipients to an expected spike in enrollment due to the current economic recession and high levels of unemployment.

During the last recession, Pell Grants recipients increased from 5.5 million in 2007 to 9.3 million in 2010. As such, the CBO projects an increase from 7.7 million in 2020 to 8.8 million in 2021.

Notably, the last time the program faced a shortfall was not even 10 years ago, on the tail of the Great Recession. And CBO in a January 2020 report estimated that the reserve fund will be emptied by 2025 if Congress continues to allocate the same level of discretionary funding for the Pell Grant program as it did in 2020 — and that was if the maximum award stayed stagnant.

To stave off potential shortfalls, the report argues it would be unwise to spend the current reserves, “especially so now when the program is facing large annual deficits.”

“After the many increases and eligibility changes to Pell in December, Congress should not consider raiding the surplus for any reason,” the report states.

The report comes as many, including NASFAA, have called to double the maximum Pell Grant as the purchasing power of the aid has decreased compared to previous decades.

“Doubling the maximum Pell Grant will provide myriad benefits not only to our nation's lowest-income students, but also to the federal government and broader society,” NASFAA argues.

While the report does not address any calls to double the maximum Pell Grant award, it does note that funding expansions to the program such as short-term Pell “could put the rest of the program in even more jeopardy than CBO projections presently predict.”

“Rather than expand the program, lawmakers will need to identify reforms to reduce the cost of Pell Grants or make space to adequately fund current benefit levels,” the report concludes, adding that lawmakers should pay close attention to the current program funding surplus to avoid a Pell funding cliff that could have major long-term implications.


Publication Date: 2/22/2021

James C | 2/22/2021 8:33:08 AM

The report doesn't mention year round Pell as a contributing cause. It is wonderful for our students but it does drive up the Pell expenditures.

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