Mandatory Spending

Function 500 - Education, Training, Employment, and Social Services

Eliminate the Add-On to Pell Grants That Is Funded With Mandatory Spending

CBO periodically issues a compendium of policy options (called Options for Reducing the Deficit) covering a broad range of issues, as well as separate reports that include options for changing federal tax and spending policies in particular areas. This option appears in one of those publications. The options are derived from many sources and reflect a range of possibilities. For each option, CBO presents an estimate of its effects on the budget but makes no recommendations. Inclusion or exclusion of any particular option does not imply an endorsement or rejection by CBO.

(Billions of dollars) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2014-2018 2014-2023
Change in Outlays -1.6 -6.1 -7.0 -8.0 -8.7 -8.8 -8.9 -9.0 -9.1 -9.2 -31.4 -76.4

Note: This option would take effect in July 2014.

The Federal Pell Grant Program is the single largest source of federal grants to low-income students for postsecondary undergraduate education. The Congressional Budget Office estimates that, for the 2013–2014 academic year, the program will provide $33 billion in grants to 8.9 million students. To be eligible for the maximum grant—$5,645 for this year—a student must demonstrate a high level of financial need and must be enrolled in school full time. Other students are eligible for reduced grant amounts.

Pell grants are funded through a combination of discretionary spending (which must be appropriated by the Congress every year) and mandatory spending (which is authorized in law permanently). Awards for this academic year will be based on a maximum grant of $4,860 set in appropriations and a $785 “add-on” based on mandatory funding; the sum of those figures is the overall maximum grant of $5,645. Under current law, the add-on is indexed to inflation through the 2017–2018 academic year (when, by CBO’s estimates, it will equal $1,240) and remains constant thereafter.

This option would eliminate the add-on to Pell grants. Over the next decade, this option would cause about 3 percent of people who will be eligible for Pell grants under current law to lose that eligibility, because eligibility is determined, in part, by the overall maximum grant, which would be reduced. In addition, grants to the 97 percent of people who would maintain eligibility would be smaller—by the full amount of the add-on for each full-time student. CBO estimates that this option would result in a reduction of $76 billion in mandatory spending over the 2014–2023 period.

A few studies suggest that some institutions have responded to past increases in the size of Pell grants by raising tuition or shifting more of their own aid to students who did not qualify for Pell grants—providing a rationale for reducing the maximum Pell grant. In addition, spreading the reductions in grants across all recipients would, for any given amount of federal savings, minimize the impact on any individual recipient.

But an argument against reducing the maximum Pell grant is that, even with the grant at its current amount, most recipients attending public four-year colleges have unmet financial need—and attending most private colleges is well beyond the means of many of those recipients. Moreover, among students who remained eligible for Pell grants under this option, grant amounts would be reduced uniformly regardless of students’ financial need, preparation for postsecondary education, or academic progress. By comparison, targeted reductions in grants might be more effective in protecting some of the program’s goals, including maximizing the effectiveness of the grants in boosting the educational attainment of students from the lowest-income families.