Eliminate or Reduce the Add-On to Pell Grants, Which Is Funded With Mandatory Spending

Background

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 provided $27 billion in aid to 7.2 million students. A student's Pell grant eligibility is chiefly determined on the basis of his or her expected family contribution (EFC)—the amount, calculated using a formula established under federal law, 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 other dependent children in the family who are attending postsecondary schools, are also taken into account. To be eligible for the maximum grant, which is $6,195 for the 2019-2020 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 more than $5,575 for the 2019-2020 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.

Funding for the Pell grant program has both discretionary and mandatory components. The maximum award funded by the discretionary component is 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 so-called add-on funding, which under current law increases the maximum award by $1,060 to $6,195.

Option

This option would reduce the maximum award in the Pell grant program. There are two alternatives under the option. One alternative would eliminate the mandatory add-on component of Pell grant funding, thereby reducing the maximum grant awarded to students to $5,135 for the 2019-2020 academic year. The second alternative would reduce the mandatory component by half, causing the maximum grant to decline to $5,665 in that year.

Effects on the Budget

Under the first alternative, the grant amount would be reduced by an average of $710 during the period. (That amount is smaller than the reduction in the maximum award because some students do not receive the maximum award.) The number of Pell recipients would be lower by about 3 percent, or about 275,000 people per year, during the 2019-2028 period. (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—$5,575 for the 2019-2020 academic year—do not qualify for a grant. As the maximum size of the grant shrinks, fewer students will meet that threshold.) CBO estimates that this alternative would reduce mandatory spending by $62 billion over the 10-year period.

Under the second alternative, the grant amount would be reduced by an average of $355 during the period. The number of recipients would be about 2 percent lower during the 2019-2028 period, or about 130,000 people per year. CBO estimates that this alternative would result in a reduction of $31 billion in mandatory spending over the 10-year period.

Under current law, program costs and the number of Pell grant recipients would grow by about 2 percent per year, CBO estimates. Under the option, those amounts would still rise over 10 years, but not by as much. CBO estimates that the distribution of EFC among applications would remain relatively stable over the next decade. CBO also estimates that most of the affected students would add to their federal student loans to the extent allowed under current law.

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

Other Effects

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. An argument 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.

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 grant amounts (and eliminating Pell grants for some students) would further increase that financial burden and might cause some students to choose a less suitable institution or to forgo some or all postsecondary education. 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.