FY 1998 Budget Summary

• E. POSTSECONDARY EDUCATION
  • Overview
  • Student Aid Overview
  • Pell Grants
  • Work-Study
  • Supplemental Educational Opportunity Grants
  • Perkins Loans
  • State Student Incentive Grants
  • Direct Student Loans and Federal Family Education Loans
  • continued ...

E. POSTSECONDARY EDUCATION

Overview

The 1998 budget request for postsecondary education reflects President Clinton’s strong support for higher education and takes important steps toward ensuring continued access to postsecondary education for all Americans. The request would significantly increase grant aid and work-study assistance while reducing student borrowing costs. Additionally, the request complements the Administration’s proposed tax relief for postsecondary education expenses, which include a series of income tax credits, deductions, and savings incentives.

The President’s tax-relief proposals are designed to significantly change the pattern of student participation in American postsecondary education by helping to make at least 2 years of education beyond high school the standard for all Americans.

While not included in the Department’s budget request, these proposals—including the America’s Hope Scholarship tax credit and the Middle-Class Bill of Rights tax deduction—are described below. The President’s proposals would provide about $4 billion in tax relief in 1998 to help make college more affordable for working and middle-income students and their families.

Following are the highlights of the Department’s 1998 request:

• Total financial aid available would grow to $47 billion, a 10 percent increase over the 1997 level. Grants, loans, and work-study opportunities would be provided for over 8 million students, or 450,000 more than in 1997.
• Pell Grant maximum award would increase by $300 to $3,000—the highest level ever—to improve access to postsecondary education for students from the neediest families. The number of recipients would increase by 348,000 to over 4 million.
• Need analysis for independent students without dependents would be changed to provide more equitable treatment of these students and allow more of them to qualify for student aid.
• A $27 million increase for the Work-Study program would add 28,000 new recipients as part of the President’s commitment to increase the number of recipients to 1 million by the year 2000. The President also has called upon colleges to use a significant portion of their new Work-Study allocations for students serving as tutors in the America Reads Challenge initiative.
• Student loan origination fees would be reduced from 4 percent to 2 percent on Stafford Loans and from 4 percent to 3 percent on other loans—cutting in half the fees charged to the neediest borrowers. In addition, the interest rates charged while the student is in school or in deferment would be reduced.
• The FFEL guaranty agency system would be streamlined to clarify the Federal Government’s role as sole guarantor of all student loans. Guaranty agency retentionof default collections would be reduced from 27 percent to 18.5 percent—the same rate as the Department’s cost of collections—and lender risk-sharing would be increased as an incentive for default prevention.
• $132 million for Presidential Honors Scholarships would reward the academic excellence of the top 5 percent of graduating students in every high school in the Nation by providing a 1-year $1,000 scholarship to help pay college costs.
• A $6 million request would fund the Advanced Placement Fee program for the first time to supplement State efforts to pay the costs of the advanced placement test for low-income students. The Department estimates that the program would assist approximately 136,000 students.
• Funding for the Minority Teacher Recruitment program would be increased by nearly 70 percent to expand the pool of minority teachers, and all Byrd Honors Scholarship recipients would be fully-funded.
• A $25 million increase for the TRIO programs would provide important outreach and support services to an additional 36,662 low-income and first-generation college students. The total number of students served by TRIO in 1998 would be nearly 725,000.

Tax Proposals (included in the Treasury budget)

• The America’s Hope Scholarship would provide a tax credit of up to $1,500 to first-year postsecondary students and to second-year students who earned at least a "B" average in their first year.
• The proposed Middle-Class Bill of Rights tax deduction would allow all taxpayers—even those who do not itemize their deductions—to deduct payments for postsecondary tuition and fees from their incomes. After a maximum $5,000 deduction during a 2-year phase-in period, the maximum deduction would be raised to $10,000 beginning January 1, 1999. Those eligible for both the tax credit and the deduction could choose between the two.
• The proposed expanded use of Individual Retirement Accounts would provide a strong incentive to individuals and families to save for college by allowing penalty-free withdrawals after 5 years if used to pay postsecondary education expenses.
• The tax code would be modified to allow a borrower to exclude from his or her taxable income any unpaid loan balance that remained after 25 years of income-contingent repayment in the Department’s student loan programs.
• The expired Section 127 provision allowing taxpayers to deduct up to $5,250 in employer-provided postsecondary tuition expenses from their incomes each year would be extended—with graduate education reinstated—through December 31, 2000.

Student Aid Summary Tables

The following tables show estimated Federal student aid funding, aid available, and recipients under the Education Department's 1998 budget request.

Aid Available to Students ($ in millions)¹

Number of Student Aid Awards

Student Aid Overview

The 1998 request for the student aid programs continues the President's commitment to opening the doors of college to more Americans. Last year, the Congress approved the President's request to provide the largest Pell Grant increase in 20 years, and to provide new Work-Study jobs to hundreds of thousands of students. This year's request builds upon these significant investments. The Administration has developed a comprehensive strategy to give every American the chance to go to college, and to make college more affordable for students and families currently struggling to pay for it.

The request would increase the maximum Pell Grant award to $3,000, expanding upon the gains made last year to restore the lost buying power of Pell Grants for needy students. Next, the budget supports the President's goal of providing Work-Study opportunities to 1 million students by the year 2000. Finally, the Administration would continue funding for Supplemental Educational Opportunity Grants (SEOG) and Perkins Loans CapitalContributions at the 1997 levels. These programs are vital in providing students from lower-income families with access to postsecondary education and training.

To improve equity in the effects of the student aid need-analysis system, the Administration is proposing to make the treatment of independent students more equitable. This change will increase the eligibility of these independent students for Pell Grants and other need-based student aid, and would better serve low-income students than would a refundable tax credit. The Department estimates that this proposed change would increase the number of Pell Grant recipients in this category by 218,000 in 1998-99, closer to the proportion of such students receiving Pell Grants before the Higher Education Amendments of 1992.

Tax Proposals

The President has stated that his goal is to make the 13th and 14th years of education as universal tomorrow as the first 12 years are today. The Administration’s loan and tax relief proposals would make postsecondary education more affordable for middle-income families and students currently struggling to pay for college. The tax proposals complement the Pell Grant request and need analysis changes that would increase postsecondary educational opportunities for lower-income Americans.

The Administration’s 1998 proposals recognize that working students and families whose tax liability is less than the full amount of the Hope Scholarship would benefit more from the higher maximum Pell Grant and need analysis formula change than from a refundable tax credit. Needy students in particular would benefit more from the up-front assistance and simplicity provided through the Pell Grant program. However, the Administration believes that Federal assistance for middle-income families struggling to finance their children’s education is better accomplished through the income tax system.

The America’s Hope Scholarship would provide a nonrefundable income tax credit of up to $1,500 annually for tuition and fee charges incurred for the first two years of postsecondary education. This tax credit would promote two years of postsecondary education as the standard for all Americans by helping more Americans better afford their educational costs.

First-year students enrolled in a degree or certificate program, or their families, could qualify for up to a $1,500 tax credit. Students could qualify for a second tax credit in a subsequent year if they earned at least a "B" average in their first year. Eligibility for the credit would be reduced by Pell and other Federal grant assistance received. No taxpayer could receive the credit for more than 2 tax years.

The President has also proposed a tax deduction for postsecondary education tuition and fees for those who are ineligible for, or choose not to take advantage of, the Hope Scholarship tax credit. The maximum deduction would be $10,000 beginning January 1, 1999, following a 2-year phase-in period with a $5,000 maximum. In addition, the President has proposed an expanded use of Individual Retirement Accounts that would permit penalty-free withdrawals to help pay postsecondary education expenses.

Furthermore, the Administration is proposing to extend the exclusion from taxable income for employer-provided educational assistance through December 31, 2000. The proposal also would reinstate graduate education as qualifying for this exclusion.

Pell Grants

The Pell Grant program helps ensure financial access to postsecondary education by providing grant aid to low- and middle-income undergraduate students. The most need-focused of the Department's student aid programs, Pell Grant awards vary in proportion to the financial circumstances of students and their families.

The Administration is proposing to increase the Pell Grant maximum award to $3,000 in 1998 from the 1997 level of $2,700. This $300 or 11-percent increase would expand access to postsecondary education for millions of disadvantaged students while also increasing opportunities for working Americans to upgrade their knowledge and skills.

Need Analysis Change

In addition to increasing the Pell Grant maximum award, the Administration is proposing to change the need determination rules in the Higher Education Act to make the income protection allowance for independent students without dependents equivalent to what is currently used for other students. This policy change would expand eligibility for all of the Department’s need-based student aid programs. As discussed above, the increase in grant assistance resulting from both this policy and the proposed increase in the Pell Grant maximum award would serve low-income students better than a refundable tax credit. The income protection allowance is a fixed amount of the student's income, based on the student's household size and number of household members in college, that is excluded from need determination for the Federal student aid programs.

Lower allowances for these independent students were established by the Higher Education Amendments of 1992. After the change took effect in 1993-94, both the number of grants and average grant received by these students fell significantly. Between 1992-93 (the year prior to enactment) and 1994-95, the proportion of grants received by this group decreased by 6.2 percent. Also during this period, the average grant award received by independent students without dependents dropped by 15 percent, even as the average award for other students—dependent students and independent students with dependents—changed very little. Although demographic and economic factors might also have played a role, these declines are thought to stem largely from the lower income protection allowances.

The Department estimates that at the $3,000 maximum award level the proposed need analysis change would increase the number of recipients in this category by 218,000 in 1998-99, restoring the group to the approximate share of Pell Grants it received before the 1992 reauthorization. The $7.6 billion request for Pell Grants, which is $1.7 billion or 29 percent over the 1997 level, includes $725 million for the estimated cost of the need analysis change.

Work-Study

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 remaining 25 percent of the student's wages are provided by the school or other eligible employer. Funds are allocated to institutions on the basis of a statutory formula, and individual award amounts to students are determined at the discretion of institutional financial aid administrators.

Students may earn their Work-Study awards by working in community service jobs. The statute requires institutions to use at least 5 percent of their Work-Study allocations to support students working in community service activities, and the President has encouraged institutions to use half of their Work-Study increase over the 1996 level for community service activities, with particular emphasis on reading tutors. Work-Study students in community service jobs meet a variety of local needs, including tutoring and literacy training.

To encourage more students to work as reading tutors, and support the President's America Reads Challenge (see Elementary and Secondary Education), the Department has waivedthe 25 percent institutional matching requirement for students who tutor kindergarten and elementary school students in reading, effective for the 1997-98 academic year. The President's goal is to have 10 percent (100,000) of the America's Reading Corps comprised of Work-Study students by 1999.

Supplemental Educational Opportunity Grants

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. SEOG funds are allocated to institutions on the basis of a statutory formula, and the institutional matching share of grants is 25 percent. Awards to students who meet general need criteria are determined at the discretion of the institutional financial aid administrators. However, schools are required to give priority to students with "exceptional need" and to Pell Grant recipients.

Perkins Loans

New Federal Capital Contributions under the Perkins Loans program supplement funds available from the repayment of outstanding loans to the program's institutional revolving funds. Approximately 2,700 participating institutions currently administer Perkins Loans revolving funds, with total assets of about $6.5 billion. These funds represent nearly 40 years of Federal capital contributions, institutional matching funds, repayments on previous loans, and reimbursements for cancellations. Under current law, institutions provide one dollar for every three Federal dollars. Borrowers currently are charged 5 percent interest during the principal repayment period and no interest during in-school, grace, and deferment periods. The annual maximum amounts a student can borrow under the Perkins Loans program are $3,000 for undergraduates and $5,000 for graduate and professional students. The cumulative maximum is $30,000 for combined undergraduate and graduate or professional study.

The $30 million request for Loan Cancellations for 1998 reflects the growing number of borrowers entering repayment who are eligible for cancellation of their Perkins loans under the expanded statutory entitlements enacted as part of the Higher Education Amendments of 1992. Eligible borrowers include those who undertake certain public service employment such as teaching in Head Start programs, full-time law enforcement, and nursing.

State Student Incentive Grants

The State Student Incentive Grant (SSIG) program provides dollar-for-dollar Federal matching funds as an incentive for State support of need-based postsecondary student grant assistance. When the program was first authorized in 1972, 28 States had undergraduate grant programs. Now all States have established need-based student grant programs, and with States overmatching their SSIG awards by about 20-1, expenditures for such grants have expanded to nearly $2 billion even as Federal funding has dropped or remained level.

The Department is proposing to eliminate funding for the SSIG program in 1998. The program has clearly achieved its original purpose and Federal support is no longer needed. As a result, the National Performance Review recommended elimination of the SSIG program. The Administration proposed a multi-year phase-out of the program in the 1996 Budget to give States time to plan for the elimination of Federal funding, and appropriations since then have fallen below the 1995 level of $63 million.

Direct Student Loans and Federal Family Education Loans

The Department of Education operates two major student loan programs: the Federal Family Education Loan (FFEL) program and the William D. Ford Direct Loan (Direct Loan) program. The Administration is committed to providing two strong programs allowing individual institutions to choose which best meets their needs and the needs of their students.

The FFEL program makes loan capital available to students and their families through some 7,100 participating 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.

In order to reduce complexity, improve efficiency for both borrowers and schools, and lower taxpayer costs, a simpler Direct Loan program was established by the Student Loan Reform Act (SLRA) of 1993. Under this program, the Federal Government uses Treasury funds to provide loan capital directly to schools, which then disburse loan funds to students—greatly streamlining loan delivery for students, parents, and schools.

The Direct Loan program began operation in academic year 1994-95 with about 7 percent of overall student loan volume. The program grew to 30 percent of volume in academic year 1995-96, and is expected to account for 36 percent in academic year 1996-97. In early 1997, there were 1,576 schools participating in Direct Loans, or about 25 percent of all schools participating in the Department’s student loan programs.

Basic Loan Program Components

Both FFEL and Direct Loans feature four types of loans with similar fees and maximum borrowing amounts:

• Stafford Loans are subsidized, low-interest loans based on financial need. The Federal Government pays the interest while the student is in school and during certain grace and deferment periods.
• Unsubsidized Stafford Loans are offered at the same low rates as subsidized Stafford Loans, but the Federal Government does not pay interest for the student during in-school, grace, and deferment periods.
• PLUS Loans are available to parents of dependent undergraduate students. The maximum interest rate for PLUS loans is higher than for Stafford or Unsubsidized Stafford Loans, and the Federal Government does not pay interest during in-school, grace, and deferment periods.
• Consolidation Loans allow borrowers with multiple student loans who meet certain criteria to combine their obligations and extend their repayment schedules.

All loans except FFEL Consolidation Loans have variable interest rates which change annually and are capped at 8.25 percent for Stafford and Unsubsidized Stafford Loans and 9 percent for PLUS Loans.

The 1998 Request

The Administration is proposing a number of changes that would reduce student borrowing costs by more than $2 billion over the next five years while improving the effectiveness and efficiency of the student loan programs. These changes include significantly reducing borrower fees, creating greater uniformity between FFEL and Direct Loan program benefits, improving incentives for default reduction, and restructuring the guaranty agency system. In addition to savings for students, the Department estimates that these proposals would save taxpayers $3.5 billion over the same period.

Borrower-Related Proposals

The budget includes the following proposals to reduce student borrowing costs and facilitate repayment:

• Loan fees for the neediest borrowers would be cut in half, thus increasing the loan dollars available to meet college costs. In the FFEL program, the 1-percent guaranty agency fee would be eliminated and the Stafford Loan origination fee would be reduced from 3 percent to 2 percent. For Direct Loans, the Stafford Loan origination fee would fall from 4 percent to 2 percent, while the origination fee for other loans would be reduced from 4 percent to 3 percent.
• Offering FFEL borrowers three of the flexible repayment plans available in the Direct Loan program—graduated, extended, and alternative—under the same terms and conditions. The current FFEL income-sensitive plan would be maintained.
• Clarifying that Direct Loan obligations remaining after 25 years, which are forgiven under income-contingent repayment, will not be treated as income for Federal tax purposes.
• Providing more similar terms for consolidation between the FFEL and Direct Loan programs, including applying to FFEL Consolidation Loans the same variable interest rate currently used for Direct Consolidation Loans, allowing borrowers to maintain interest subsidy benefits associated with the Stafford portions of their consolidation loans, and allowing FFEL borrowers to consolidate while they are in school.

Guaranty Agency Proposals

The Administration is proposing changes in the guaranty agency system to emphasize that these State and private nonprofit entities act only as agents of the Federal Government. Currently, guaranty agencies use Federal funds they hold in reserve to pay a small portion of each lender default claim; the balance is funded through Federal payments. To clarify that the Federal Government is the sole insurer of FFEL loans, the Department would pay 100 percent of each eligible lender default claim. With these changes, guaranty agencies would no longer need to hold Federal funds in reserve. Therefore, the Administration proposes to recall some $2.5 billion in unneeded Federal reserve funds over the next five years. Other proposed changes include:

• Reducing the percentage of default collections that guaranty agencies may retain from 27 percent to 18.5 percent—the same average percentage the Department pays its default collection contractors. This would help eliminate a current financial disincentive to preventing student loan defaults.
• Requiring periodic recertification of, and certain changes to, guaranty agency agreements. Department agreements would require public disclosure of specific performance information, annual audits, and submission of timely, accurate, and consistent data to the Department’s National Student Loan Data System.
• Providing the Secretary with the authority to terminate guaranty agency agreements based on agency performance, and to use performance-based contracts for services currently performed by guaranty agencies.

Lender-Related Proposals

The following proposals would affect lenders participating in the FFEL program:

• Increasing the incentive to prevent defaults by raising lender default risk-sharing from the current 2 percent to 5 percent. The Federal Government would reimburse lenders for 95 percent of eligible default claim amounts, instead of the current 98 percent.
• In order to reduce borrower costs and standardize Federal interest subsidy costs across the FFEL and Direct Loan programs, the interest rate for Stafford Loan and Unsubsidized Stafford Loan borrowers during in-school, grace, and deferment periods would equal the Department’s borrowing costs. Since FFEL lender loan servicing costs are lower when borrowers are not in repayment status, the lender’s return can be lowered, with the savings passed on to students by reducing the interest rate.
• In place of the current supplemental pre-claims assistance payment to guaranty agencies to help lenders collect delinquent loans, the Department proposes a performance-based lender payment to guaranty agencies tied to agency success in bringing delinquent loans current.

Student Financial Aid Management

In 1998, the Department will spend almost $668 million, an increase of $44.2 million over the 1997 level, to administer the Federal student aid programs and make payments for services by FFEL guaranty agencies. This total, which makes up nearly 65 percent of the Department’s overall administrative budget, is funded from three sources: mandatory funding authorized under Section 458 of the Higher Education Act (80 percent), discretionary Program Administration (13 percent), and a discretionary appropriation covering a portion of administrative costs associated with the FFEL program (7 percent). The Department’s request for funding under Section 458 is $218 million below the authorized level. Of these student aid management funds, $152 million reflects direct Federal payments to support FFEL guaranty agency activities. For more details, see Departmental Management (Part G of this document).

Direct any questions to Martha Jacobs, Budget Service