Tighten Eligibility for Pell Grants

Background

The Federal Pell Grant Program is the largest source of federal grant aid to low-income students for undergraduate education. Recipients may enroll at four-year colleges and universities, for-profit schools, two-year community colleges, institutions that specialize in occupational training, or other educational institutions. (Pell grants generally are not available to students pursuing graduate or professional degrees.) For the 2016-2017 academic year, the program provided $27 billion in aid to 7.2 million students.

Eligibility for Pell grants is chiefly determined on the basis of a student's expected family contribution (EFC)—the amount, calculated using a formula established under federal law, that the government expects a family to contribute toward the cost of the student's postsecondary education. 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 other dependent children in the family attending postsecondary schools, are also taken into account. Under current law, a student cannot receive less than 10 percent of the maximum Pell grant award. Because a student's award is the maximum award minus the student's EFC, students with an EFC exceeding 90 percent of the maximum Pell grant award (that is, an EFC of $5,575 or greater for the 2019-2020 academic year) do not qualify for a grant.

Funding for the Pell grant program has both discretionary and mandatory components. The discretionary component is the maximum award set in each fiscal year's appropriation act. For the 2019-2020 academic year, that amount is $5,135 per student. One mandatory component is the funding stemming from the Higher Education Act that is dedicated to supporting the discretionary program. The other mandatory component is add-on funding that increases the maximum award. For the 2019-2020 award year, that increase is $1,060, resulting in a maximum award of $6,195. The Congressional Budget Office estimates that the average grant for the 2019-2020 academic year will be $4,200.

Option

This option would tighten eligibility for Pell grants. The option could be implemented in one of three ways, and the savings would depend on the approach taken.

The first two alternatives would lower the EFC threshold. Under the first alternative, students with an EFC exceeding 65 percent of the total maximum Pell grant award (that is, an EFC of $4,026 or more for the 2019-2020 academic year) would be ineligible for a Pell grant. Under the second alternative, eligibility would be limited to students whose EFC is zero.

The third alternative would take a different approach, adding a criterion for Pell grant eligibility. To qualify for a grant under this alternative, students would need to be from families whose adjusted gross income is below 250 percent of the federal poverty level (FPL). For a family of four in 2018, the FPL is $25,100. In that example, Pell grants for the 2019-2020 program year would be limited to students from families of four with income below $62,750.

Effects on the Budget

Under the first alternative, the number of Pell grant recipients would be about 5 percent lower during the 2019-2028 period, which represents a reduction of about 400,000 people per year, on average. Recipients who no longer qualified for grants under this alternative would have received smaller Pell grants, averaging $1,260 (or less than one-third of the estimated average grant amount under current law). If the maximum discretionary Pell grant award remained at $5,135, this alternative would yield discretionary savings of $3 billion and mandatory savings of $1 billion from 2019 through 2028, CBO estimates, provided that federal appropriations were reduced accordingly.

Under the second alternative, the number of Pell grant recipients would be 37 percent lower during the 2019-2028 period, which is a reduction of 3 million people per year, on average. Again, recipients who no longer qualified for grants under this alternative would have received slightly smaller Pell grants, averaging $3,800 (or about 90 percent of the estimated average grant amount under current law). This alternative would yield discretionary savings of $86 billion and mandatory savings of $21 billion through 2028, CBO estimates. Although this alternative would reduce the number of Pell grant recipients by about 8 times as much as under the first alternative, the savings would be more than 20 times larger because the average amount granted to affected people under the second alternative is larger.

Under the third alternative, the number of Pell grant recipients would be about 6 percent lower during the 2019-2028 period, which is a reduction of 465,000 people per year, on average. Recipients who no longer qualified for grants under this alternative would have received Pell grants averaging $2,700 (or about 65 percent of the estimated average grant amount under current law). The savings would be larger under this alternative than under the first alternative because the average grant amount among those students is larger. Through 2028, discretionary savings would total $9 billion, and mandatory savings would total $2 billion, CBO estimates.

Under current law, the Pell Grant program's costs and number of recipients are estimated to grow by about 2 percent per year. That growth is somewhat slower than the growth in the total number of students attending postsecondary schools because some students would lose eligibility for Pell grants as their family income grew. Under this option, the distribution of Pell grant applications by EFC, income, and family size would remain stable over the next decade, CBO estimates. To the extent allowed under current law, affected students would compensate by borrowing more through the federal student loan program, in CBO's judgment. (Funding for the Pell grant program is primarily discretionary and, thus, subject to appropriation each year. Therefore, CBO does not show direct spending effects, including student loan effects, for changes specific to the Pell grant program.) The effects on outlays are much smaller in 2019 than in other years because the option would take effect in July of that year and the fiscal year ends in September.

Uncertainty about the number of Pell grant recipients is the primary source of uncertainty in CBO's estimates. The number of recipients is generally affected by economic factors, including job opportunities, the cost of attending school, and expectations of future opportunities for college graduates. The number of Pell grant recipients is also affected by the discretionary maximum award amount, which is set each year.

Other Effects

An argument for this option, applicable to all three alternatives, is that it would focus federal aid on students who, on the basis of the federally calculated EFC (and the federally calculated FPL in the third alternative), tend to have lower income. Students who would be affected under the first alternative would probably still be able to pay to attend a public two-year college: Tuition and fees at those schools for the 2016-2017 academic year averaged about $3,500, which is below the EFC of students who would be affected under that alternative.

An additional argument, applicable to all three alternatives, is that many students affected by the tightening of eligibility criteria for Pell grants would qualify for other financial support. Most students whose EFC was in the affected range under either of the first two alternatives would be eligible for $3,500 or more in federal loans that are interest-free while students are in school. Furthermore, educational institutions might respond to the change by shifting some of their own aid to students who would not be eligible under the option. (A few studies suggest that institutions responded to past increases in the size of Pell grants by raising tuition and shifting more of their own aid to students who did not qualify for those grants.)

An argument against all three alternatives is that many Pell grant recipients have educational expenses that greatly exceed the sum of their family's EFC and other aid (in the form of grants, loans, or work-study programs) from federal, state, institutional, or other sources. In the 2015-2016 academic year, for example, 30 percent of students with an EFC above 65 percent of the maximum Pell grant at the time and 85 percent of students with an EFC between zero and 65 percent of the maximum grant incurred educational expenses that exceeded the sum of their family's EFC and aid other than from Pell grants. Denying Pell grants to those students would further increase the cost of obtaining an undergraduate education and might cause some of them to pursue less postsecondary education or to forgo it altogether. Furthermore, some families may not be able or willing to contribute the EFC amount.

An argument against the third alternative is that high-income families who are eligible for Pell grants on the basis of the EFC formula because they have several children in college at the same time might not qualify on the basis of the FPL formula. Thus, that alternative would limit benefits for some families with several members in college.