The debt deal that President Obama announced on Sunday ends a weeks-long stalemate over the nation's borrowing limit that had threatened to disrupt the flow of federal student aid and drive up the interest rate on colleges' debts.
The agreement, which raises the debt ceiling by $4-trillion, ensures that the government will have enough money to continue to pay out student aid and other benefits, and averts a default on the nation's debt that could have made it more expensive for colleges to borrow. It also provides $17-billion over two years to shore up the Pell Grant program, which has doubled in cost over the past three years and faces a multibillion-dollar deficit.
By closing most of that gap, the deal makes it easier for appropriators to maintain the maximum award at $5,550 in 2012 without slashing other programs. But the reprieve comes at a cost and is likely to be temporary. To pay for Pell Grants, the deal will end subsidies for interest on graduate students' loans while they are still in school, while eliminating the interest-rate reduction for on-time loan repayment for all borrowers.
At the same time, the deal will force Congress to cut at least $1-trillion from the federal budget, including $7-billion in the 2012 fiscal year. Student-aid advocates worry that the bill's spending caps, coupled with the remaining shortfall in the Pell Grant program, will force Congress to cut the maximum award or shrink other student-aid programs going forward.
"We're grateful for the bipartisan support of $17-billion towards Pell Grants, but the question is, What will we have to give up next to save Pell in the future?" said Cynthia A. Littlefield, director of federal relations for the Association of Jesuit Colleges and Universities. "We're now in uncharted territory."
Adding to the uncertainty is the bill's creation of a Congressional committee to slash another $1.5-trillion from the federal budget. If the committee fails to come up with a plan to raise taxes or to reduce spending, an automatic across-the-board cut would kick in. That would result in a 6.7-percent decrease in funds for education programs, except for Pell Grants, which are exempt from automatic cuts under federal rules, according to the Committee for Education Funding.
Lawmakers have already sacrificed several student-aid benefits to preserve the Pell program. In April, Congress abolished the Leveraging Educational Assistance Partnership program, or LEAP, which bolstered states' need-based aid programs, and ended a policy that allowed students to receive two Pell Grants in a single year.
Ending the in-school interest subsidy and the on-time repayment incentive will save the government an estimated $21.6-billion over 10 years, according to the Congressional Budget Office. The rebate for on-time repayment is now half a percentage point for Stafford loans and 1.5 percentage points for PLUS loans.
While most of the savings will be redirected to the Pell Grant program, some $4.6-billion will be diverted to deficit reduction. Meanwhile, the cost of borrowing will increase, at least at the graduate-student level. Mark Kantrowitz, a student-aid expert and publisher of FinAid.org, estimates that the average graduate borrower will pay an additional $7,000 in interest on federal student-loan debt.
Justin Draeger, the president of the National Association of Student Financial Aid Administrators, said his group was "glad to see a bipartisan commitment to the Pell program," given the threat the program has been under in recent months. Earlier this year, House Republicans passed a budget blueprint that would have returned Pell Grants to 2008 spending levels.
Still, he stressed that "student aid is not out of the woods" yet.
"Historically, we've had periods of student-aid preservation and periods of student-aid expansion," he said. "Now it looks like we're going through a protracted period of student aid preservation ... or even retraction."