Mandatory Spending

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

Eliminate the Add-On to Pell Grants, Which 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 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2017-2021 2017-2026
Change in Outlays -1.6 -6.0 -6.2 -6.3 -6.4 -6.5 -6.6 -6.7 -6.8 -6.9 -26.5 -60.0

This option would take effect in July 2017.

The Federal Pell Grant Program is the largest source of federal grant aid to low-income students for undergraduate education. For the 2016–2017 academic year, the program will provide $28 billion in aid to 7.8 million students, the Congressional Budget Office estimates. A student’s Pell grant eligibility is chiefly determined on the basis of his or her expected family contribution (EFC)—the amount that the federal government expects a family to pay toward the student’s postsecondary education expenses. The EFC is based on factors such as the student’s income and assets. For dependent students (in general, unmarried undergraduate students under the age of 24 who have no dependents of their own), the parents’ income and assets, as well as the number of people (excluding parents) in the household who are attending postsecondary schools, are also taken into account. To be eligible for the maximum grant, which is $5,815 for the 2016–2017 academic year, a student must have an EFC of zero and be enrolled in school full time. For each dollar of EFC above zero, a student’s eligible grant amount is reduced by a dollar. Students with an EFC exceeding 90 percent of the maximum grant (that is, an EFC of $5,234 for the 2016–2017 academic year) are ineligible for a grant. Part-time students are eligible for smaller grants than those received by full-time students with the same EFC.

Since 2008, funding for the Pell grant program has had both discretionary and mandatory components. The discretionary component, which is set in each fiscal year’s appropriation act, specifies a maximum award of $4,860 per student for the 2016–2017 academic year. That award is bolstered by mandatory funding, which provides an “add-on.” The add-on for the 2016–2017 academic year is $955, resulting in the total maximum award of $5,815. Under current law, the add-on is indexed to inflation through the 2017–2018 academic year and remains constant thereafter.

This option would eliminate the add-on to Pell grants, thereby reducing the maximum grant awarded to students with an EFC of zero to $4,860 for the 2016–2017 academic year. There would be two effects. First, about 3 percent of people who will be eligible for Pell grants under current law would lose that eligibility—because to be eligible, people would now need an EFC that was below 90 percent of the new, smaller maximum grant. Second, people who remained eligible would see their grant size reduced by the amount of the add-on. CBO estimates that this option would result in a reduction of $60 billion in mandatory spending over the 2017–2026 period.

A few studies suggest that some postsecondary 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. A rationale for reducing the maximum Pell grant, therefore, is that institutions might become less likely to raise tuition and more likely to aid students who had lost eligibility for a Pell grant or who were receiving a smaller Pell grant. In addition, this option would spread the reductions in grants among all recipients, minimizing the impact on any individual recipient.

But an argument against this option is that even with the grant at its current amount, the cost of attending a public four-year college is greater for most recipients than their EFC plus all financial aid—and for many recipients attending private colleges, the gap is even larger. Reducing Pell grants (and eliminating them for some students) would further increase that financial burden and might cause some students to choose a less suitable institution, less postsecondary education, or none at all. Moreover, among students who remained eligible for Pell grants under this option, grant amounts would be reduced uniformly, regardless of the students’ financial need. By contrast, targeted reductions in grants might be more effective in protecting one of the program’s goals: boosting the educational attainment of students from the lowest-income families.