The Pell Grant Program: Recent Growth and Policy Options

The Federal Pell Grant Program was created to improve the access of low-income students to postsecondary education. Grant recipients enroll at a variety of educational institutions, including four-year colleges and universities, for-profit schools, two-year community colleges, and institutions that specialize in occupational training. Grants are awarded on the basis of financial need and academic course load, and the maximum grant a student can receive for the 2013–2014 award year is $5,645. During the most recent award year for which data are available (July 1, 2011, to June 30, 2012), the program provided $33.6 billion in grants to some 9.4 million students at U.S. educational institutions.

The cost of the program has risen dramatically in recent years. From 2006–2007 to 2010–2011, real (inflation-adjusted) spending on Pell grants increased by 158 percent. That change resulted from an 80 percent rise in the number of recipients and a 43 percent real increase in the amount of the average grant during those four years (see figure below). Spending for the program declined in 2011–2012 because of a reduction in the amount of the average grant.

Why Did the Program’s Costs Increase So Much?

The large increase in the number of grant recipients was the most significant contributor to the program’s rising costs. The expansion had its roots in several factors:

• Changes in the economy,
• Changes in the way postsecondary education is provided, and
• Choices made by policymakers to expand the program.

The recession of 2007–2009 and the subsequent slow recovery drew more students into the recipient pool. Eligibility increased as adult students and the families of dependent students experienced losses in income and assets; enrollment of eligible students also rose as people who had lost jobs sought to acquire new skills and people who would have entered the workforce enrolled in school because they could not find employment. The expansion of online education, particularly at for-profit institutions, attracted still more students, many of whom were eligible for Pell grants. Rising tuition has put more pressure on family finances and made applying for the program more attractive. Legislated policy changes, including larger grants, simpler applications, expanded eligibility, and the increased availability of federal aid for online study, provided more grants to students who would have enrolled even without the changes and encouraged others to enroll and submit grant applications.

Growth in the amount of the average Pell grant also contributed to rising program costs; that average rose by more than 50 percent (in nominal terms) between the 2006–2007 and 2010–2011 award years (and then declined in 2011–2012). Legislated changes to the program played a significant role in those developments. First, lawmakers raised the maximum grant each year from 2006–2007 to 2010–2011, thereby increasing the size of almost all grants. The maximum grant rose from $4,050 to $5,550 over that period (and then remained unchanged for 2011–2012). The higher maximum boosted grants for recipients who would have been eligible under the 2006–2007 maximum by an average of $1,200 compared with what they would have received if the maximum grant had not increased. Second, law-makers established a supplemental grant for year-round students in 2009–2010 and 2010–2011, which was then repealed for the 2011–2012 award year. That change first increased and then decreased the average grant amount for all recipients by more than $200.

How Would Various Policy Changes Affect the Program?

Analysts and policymakers have expressed concerns about the cost of Pell grants, the grants’ adequacy to help pay for education, and the complexity of the rules for eligibility and the application process. The CBO has examined options that have been proposed to address those concerns, in several categories:

• Reduce the number of grant recipients,
• Reduce the amounts of the grants,
• Increase the grant amounts, and
• Simplify eligibility criteria and the grant application.

Options for reducing the number of students receiving grants include tightening one or more of the major criteria for eligibility, which pertain to financial need, academic readiness for enrollment, academic progress once enrolled, and enrollment in a minimum number of credit hours.

The amounts of the grants could be cut by reducing the size of all of the grants, either immediately or gradually, or by shrinking the amounts available for particular groups of students. To maximize savings, options that tighten eligibility could be combined with those that reduce the size of grants.

Alternatively, if policymakers believed that the current grant amounts are too small, they could increase the size of grants for all low-income students, immediately or gradually, or offer greater amounts to students who make particular educational choices.

Another set of options could reduce the program’s complexity by simplifying the criteria for eligibility and the grant application. One approach would reduce the amount of financial information applicants must provide on the Free Application for Federal Student Aid (FAFSA); another would tie eligibility to federal poverty guidelines.

The effects of the options would depend on how they were specified and implemented. CBO analyzed illustrative versions of each to estimate effects on recipients and program costs. For example, reducing the maximum grant to $4,860 in 2014–2015 would save an average of about $7 billion annually over 10 years, whereas increasing that maximum amount to $6,400 would boost costs by about $5 billion annually. A set of options that would tighten means-testing, impose more rigorous academic requirements, and reduce the grant amounts could cut the program’s costs in half, saving an average of about $20 billion per year, but would reduce the number of recipients by 40 percent, according to CBO’s estimates.

How Else Might the Federal Government Provide Aid to Low-Income Students?

Lawmakers might consider several alternative methods for helping students to pay for postsecondary education:

• Forgivable loans,
• Grant commitments to middle and high school students,
• Federal support of state grant programs, and
• Grants for occupational training.

Each of those approaches presents advantages and dis-advantages. For example, loans made at the beginning of a term that were forgiven upon successful course completion but had to be repaid otherwise would effectively be conditional grants. And although those forgivable loans could help make federal spending more effective by boosting completion rates, they also might discourage some students either from enrolling or from taking challenging courses, and they could increase the amount of some students’ debt.

Accounts showing grant commitments to middle and high school students might make low-income students and their families aware earlier of the existence of federal financial aid, thereby encouraging families to start planning earlier for college. However, a family that qualified for such a program only after a sudden reduction in income while a student was in high school or already enrolled in a postsecondary program could receive significantly less federal aid than it might under the current Pell grant program.

Federal matching funds for state need-based grant programs could reduce duplication of effort between those programs and the Pell grant program and reduce federal administrative costs. Even with such matching funds, however, fiscal constraints in some states could still result in a reduction in the amount of aid available to students.

Grants to support occupational training could provide wider educational options to adults seeking new job skills. However, such grants might spur the creation of poor-quality programs.