Fiscal Year 2005 Budget Summary February 2, 2004
Section II. D. Student Financial Assistance
The 2005 budget reflects President Bush's commitment to equal access to a quality postsecondary education for all Americans. The request would increase funding for the Pell Grant program, the foundation of Federal need-based student financial assistance, by over $800 million; create a new $33 million initiative within Pell Grants for students completing the State Scholars program in high school; and offer a broad package of student benefits and program improvements in the student loan programs.
Following are the highlights of the Administration's 2005 budget:
In addition to budget proposals, the Administration's 2005 request for postsecondary education includes a package of loan program proposals for the upcoming reauthorization of the Higher Education Act of 1965. These proposals are intended to make college more affordable for students and their families and to strengthen the financial stability of the student loan programs. These reforms would:
Budget Authority ($ in millions)
Aid Available to Students ($ in millions)1
Number of Student Aid Awards
Number of Postsecondary Students Aided by Department Programs
In addition to the Department of Education's grant, loan, and work-study programs, significant support for postsecondary students and their families is available through tax credits and deductions for higher education expenses, including tuition and fees. For example, in 2005 students and families will save an estimated $3.5 billion under the HOPE tax credit, which allows a credit of up to $1,500 for tuition and fees per eligible student during the first 2 years of postsecondary education; $2.2 billion under the Lifetime Learning tax credit, which allows a credit of up to $2,000 per federal tax return for undergraduate and graduate tuition and fees; $2.6 billion under an above-the-line deduction of up to $4,000 annually in higher education expenses; and $780 million in above-the-line deductions for interest paid on postsecondary student loans. In addition, the Administration is proposing to revise and simplify rules for three higher education tax benefitsthe Lifetime Learning credit, the HOPE credit, and the above-the-line deduction for higher education expenses.
The Pell Grant program helps ensure financial access to postsecondary education by providing grant aid to low- and middle-income undergraduate students. The program is the most need-focused of the Department's student aid programs, with individual awards varying according to the financial circumstances of students and their families.
The Administration requests $12.9 billion to support Pell Grants in 2005. In recent years, the number of Pell Grant applicants and recipients has grown much faster than historical trends would predict (as has college enrollment overall). Specifically, from 2000-01 to 2003-04, the number of Pell recipients is expected to increase an average of 413,000 recipients per award year, compared to an average of 32,000 recipients per award year from 1996 to 1999. After not growing by more than 2.6 percent for any award year from 1995-96 to 2000-01, the number of valid Pell Grant applicants grew by 17.5 percent between award years 2001-02 and 2002-03, and is projected to grow by 7 percent in 2003-04. These increases primarily result from an influx of independent students (generally, independent students are older and do not depend on parents or guardians to pay for college).
The Budget assumes the significant surge in the applicant growth rate that began with the 2001-02 award year will continue to gradually decline from the current observed rates in AY 2003-04 and return to levels of 5.0 percent and 4.0 percent in AY 2004-05 and AY 2005-06, respectively. It is important to note, however, that if applicant growth rates continue at their unusually high levels, projected Pell Grant program costs would significantly increase above the budget estimates.
Because of this unexpected growth, as well as a $700 increase in the maximum grant from 2000 to 2002 and insufficient appropriations to cover program costs, the request assumes a total Pell Grant funding shortfall of $3.7 billion by the end of award year 2004-05. This shortfall poses a serious threat to the long-term stability of the Pell Grant program. The Administration is committed to working with Congress to eliminate this problem and put the program on a firm financial footing.
The Budget assumes enactment of the Administration's proposal to allow the Internal Revenue Service to match income data on student aid applications with applicant tax data, to ensure students do not receive awards in excess of amounts for which they are eligible. This proposal would save $50 million in Pell Grant costs in award year 2005-06 and substantially more in future years.
The Administration also requests $33 million for Enhanced Pell Grants for State Scholars, as part of the President's Jobs for the 21st Century initiative, to encourage students and States to participate in the State Scholars program. This proposal would increase Pell Grants by up to $1,000 for students who have completed the State Scholars curriculum in high school. Currently, 14 states participate in the State Scholars program, which entails completing a demanding curriculum in high school in preparation for technical school, community college, university, or work. Students who complete a rigorous curriculum (with at least three years of mathematics and science, as well as four years of English and social studies, and courses in foreign languages) are more successful in pursuing and completing further education. State Scholar funding would be capped at $33 million in 2005. If recipients qualify for more than this amount, a process will be developed to allocate awards within the available funding level.
The Supplemental Educational Opportunity Grant, Work-Study, and Perkins Loan programs are collectively referred to as the "campus-based" programs; grants in these programs are made directly to participating institutions, which have considerable flexibility to package awards to best meet the needs of their students. The current statutory formulas allocating campus-based funding have historically distributed a disproportionate share of funding to schools that have participated in the program the longest. Since these longstanding participants do not have a higher proportion of needy students than other institutions, these formulas have been identified as inequitable by the Administration's Program Assessment Rating Tool (PART). Accordingly, the request proposes to phase in revised allocation formulas beginning in 2005.
The Supplemental Educational Opportunity Grant (SEOG) program provides grant assistance of up to $4,000 per academic year to undergraduate students with demonstrated financial need. The $770 million request would leverage $205 million in institutional matching funds to make available a total of approximately $975 million in grants to an estimated 1.3 million recipients.
SEOG funds are allocated to institutions according to a statutory formula and require a 25 percent institutional match. Awards are determined at the discretion of institutional financial aid administrators, although schools are required to give priority to Pell Grant recipients and students with the lowest expected family contributions.
The Work-Study program provides grants to participating institutions to pay up to 75 percent of the wages of needy undergraduate and graduate students working part-time to help pay their college costs. The school or other eligible employer provides the remaining 25 percent of the student's wages. Funds are allocated to institutions according to a statutory formula, and individual award amounts to students are determined at the discretion of institutional financial aid administrators. At the request level, nearly 1 million students would receive more than $1 billion in award year 2005-06.
The program encourages institutions to use Work-Study funds to promote community service activities. Institutions must use at least 7 percent of their Work-Study allocations to support students working in community service jobs, and such activities must include at least one reading tutor or family literacy project. In addition, the Department waives the 25 percent employer-matching requirement for students who work as reading or math tutors.
The Administration is proposing to replace the 7 percent community service requirement with a separate set-aside for community service, equal to 20 percent of the Work-Study appropriation. The Program Assessment Rating Tool found that while institutions placed an average of 15 percent of their students in community service jobs, many institutions (including many "elite" colleges and universities) do not meet even the 7 percent requirement. Schools would apply for community service funds separately from their regular allocation.
The Perkins Loan program provides long-term, low-interest loans to undergraduate and graduate students with demonstrated financial need at 2,000 institutions. Total assets of over $7 billion represent nearly 40 years of Federal capital contributions, institutional matching funds, repayments on previous loans, and reimbursements for cancellations.
Perkins Loan borrowers pay no interest during in-school, grace, and deferment periods, and are charged 5 percent interest during the principal repayment period. Annual borrowing limits are $4,000 for undergraduate students and $6,000 for graduate and professional students.
The request includes no funding for new Perkins Loan Federal Capital Contributions. The PART found that these funds are no longer necessary, as repayments of existing Perkins Loans into Federal revolving funds held at institutions will continue to support more than $1 billion in new Perkins Loans each year. The PART analysis further concluded that the Federal Family Education Loan and Ford Direct Student Loan programs provide sufficient low-interest-rate loans to assure the availability of affordable loan aid. The current rate for Stafford Loans, for example, is 3.42 percentconsiderably lower than the 5 percent charged to borrowers under Perkins Loans.
Perkins Loan Cancellations reimburse institutional revolving funds for borrowers whose loan repayments are canceled in exchange for undertaking certain public service employment, such as teaching in Head Start programs, full-time law enforcement, or nursing. Cancellations have increased significantly in recent years due to expansions of eligibility by the Higher Education Amendments of 1992 and 1998.
New loan volume (in millions)
Number of loans (in thousands)
The Department of Education operates two major student loan programs: the Federal Family Education Loan (FFEL) program and the William D. Ford Federal Direct Loan (Direct Loan) program. These two programs meet an important Department goal by helping ensure student access to and completion of high-quality postsecondary education. Competition between the two programs and among FFEL lenders has led to a greater emphasis on borrower satisfaction and resulted in better customer service to students and institutions.
The FFEL program makes loan capital available to students and their families through some 3,500 private lenders. There are 36 active State and private nonprofit guaranty agencies which administer the Federal guarantee protecting FFEL lenders against losses related to borrower default. These agencies also collect on defaulted loans and provide other services to lenders. The FFEL program accounts for about 75 percent of new student loan volume.
Under the Direct Loan program, the Federal Government uses Treasury funds to provide loan capital directly to schools, which then disburse loan funds to students. The Direct Loan program began operation in academic year 1994-95 and now accounts for about 25 percent of new student loan volume.
Basic Loan Program Components
Both FFEL and Direct Loans feature four types of loans with similar fees and maximum borrowing amounts:
In recent years, a combination of historically low interest rates and aggressive marketing have resulted in dramatic increases in Consolidation loan volume, which grew from $12 billion in fiscal year 2000 to $42 billion in fiscal year 2003.
The 2005 Request
The budget includes a package of student loan proposals related to the upcoming reauthorization of the Higher Education Act (HEA). The proposals include:
Student Aid Program Management
The Administration proposes to centralize its request for $934.6 million in 2005 to administer the Federal student aid programs within a unified new discretionary Student Aid Administration account. The current student aid administration budget structure split between mandatory and discretionary accountshinders the increased accountability for reducing costs and improving financial controls that are at the foundation of the Secretary's Blueprint for Management Excellence.
The 2005 request represents a $22.9 million, or 2.5 percent, increase over the amount supporting student aid administrative activities in 2004. The bulk of the increase supports information technology initiatives, such as the Common Services for Borrowers initiative, that will help the Department improve services to students, parents and schools; increase efficiency in the face of steadily expanding workload; and streamline and enhance the effectiveness of oversight and financial management efforts. Of this total, the budget includes $7 million to support the implementation of a system to use Internal Revenue Service data to verify income information on student aid applications.
Primary responsibility for administering the student aid programs lies with the Office of Postsecondary Education and the performance-based Federal Student Aid (FSA). FSA was created by Congress in 1998 with a mandate to modernize student aid delivery and management systems, improve service to students and other student aid program participants, reduce the cost of student aid administration, and improve accountability and program integrity. Most student aid administrative funding supports payments to guaranty agencies and to private contractors that service Direct Loans, process student loan applications, and disburse and account for student aid awards to students, parents, and schools.
For further information contact the ED Budget Service.
This page last modifiedFebruary 2, 2004 (mjj).