Fiscal Year 2005 Budget Summary — February 2, 2004

Archived  Information

Section II. D.  Student Financial Assistance

• Overview
• Student Loan Reauthorization
• Student Aid Summary Tables
• Tax Benefits for Postsecondary Students and Their Families
• Pell Grants
• Supplemental Educational Opportunity Grants
• Work-Study
• Perkins Loans
• Federal Family Education Loans and Direct Loans

Overview

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:

• Overall student financial aid available would expand to $73.1 billion, excluding the consolidation of existing student loans, an increase of $4.4 billion or 6 percent over the 2004 level. The number of recipients of grant, loan, and work-study assistance would grow by 426,000 to 10 million students and parents.

• An $856 million increase for the Pell Grant program, for a total of $12.9 billion, to fully fund the cost of maintaining a $4,050 maximum award for over 5.3 million students in award year 2005-2006, and to support new Enhanced Pell Grants for State Scholars. Since 2000, the number of Pell recipients has grown by nearly 25 percent, thanks in part to the overall boom in college enrollment.

  • Although funding for Pell Grants has increased since fiscal year 2000 by $4.4 billion, or nearly 60 percent, in recent years both insufficient Pell appropriations and a surge in the number of Pell Grant recipients is expected to result in a $3.7 billion funding shortfall at the end of the 2004-2005 award year. The Administration is committed to working with Congress to address this problem and put the program on firm financial footing.

• Within the Pell Grant total, the request includes $33 million for Enhanced Pell Grants for State Scholars. This proposal, which is part of the President's Jobs for the 21st Century initiative, would encourage States to offer and students to take demanding high school courses by increasing Pell Grants by up to $1,000 for first-year, full-time students who complete a rigorous State Scholars program of study in high school.

• A proposed Student Aid Administration account would consolidate nearly $935 million in administrative funding, currently split between two separate accounts, to improve accountability and ensure the efficient, cost-effective delivery of over $100 billion in Federal student aid. Most of these funds support payments to private- sector contractors or guaranty agencies that help administer the student loan programs

Student Loan Reauthorization

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:

• Increase loan forgiveness for mathematics, science, and special education teachers serving poor communities;

• Reduce interest rates for most borrowers, under the current interest rate environment, by retaining the variable interest rate structure after July 1, 2006;

• Increase loan limits for first-year students from $2,625 to $3,000. The current loan limits have remained essentially unchanged since the early 1970s;

• Broaden the availability of extended repayment options;

• Phase out higher special allowance payments for loans funded with the proceeds of certain tax-exempt securities;

• Allow low-default schools more flexibility in disbursing loan funds;

• Clarify that student aid applicants who have been convicted of a drug-related offense are only ineligible for Federal student aid if the offense was committed while they were attending school;

• Strengthen the financial stability of the FFEL system by requiring guaranty agencies to collect the currently optional 1 percent insurance premium on all loans guaranteed or disbursed after October 1, 2004; and

• Reserve $3 billion for unspecified further student benefits. These additional proposals—which could include reduced fees, default prevention activities, or additional loan limit increases—will be developed in consultation with Congress as part of the HEA reauthorization process.

Student Aid Summary Tables

Budget Authority ($ in millions)

Aid Available to Students ($ in millions)¹

Number of Student Aid Awards
(in thousands)

Number of Postsecondary Students Aided by Department Programs

Tax Benefits for Postsecondary Students and Their Families

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 benefits—the Lifetime Learning credit, the HOPE credit, and the above-the-line deduction for higher education expenses.

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 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.

Campus-Based Programs

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.

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. 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.

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 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.

Perkins Loans
(BA in millions)

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 percent—considerably 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.

Federal Family Education Loans and Direct Loans

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:

• 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. The interest rate varies annually and is capped at 8.25 percent. For July 1, 2003 through June 30, 2004, the rate for borrowers in repayment has been set at 3.42 percent.

• 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 at slightly higher rates than Stafford or Unsubsidized Stafford Loans, and the Federal Government does not pay interest during in-school, grace, and deferment periods. The interest rate varies annually and is capped at 9 percent. The 2003-2004 rate is 4.22 percent.

• Consolidation Loans allow borrowers with multiple student loans who meet certain criteria to combine their obligations and extend their repayment schedules. The rate for both FFEL and Direct Consolidation Loans is based on the weighted average of loans consolidated rounded up to the nearest 1/8th of a percent.

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:

• Increased loan forgiveness: Loan forgiveness for highly qualified math, science, and special education teachers serving low-income communities would be expanded from $5,000 to a maximum of $17,500. Schools in these communities often are forced to hire uncertified teachers or assign teachers who are teaching "out-of-field." This proposal would help these schools recruit and retain highly qualified math, science, and special education teachers.

• Variable interest rates: The borrower rate on Stafford and Unsubsidized Stafford Loans is scheduled to be fixed at 6.8 percent for new loans beginning July 1, 2006. Under current interest rate projections, this would result in a substantial increase in interest rates for most borrowers. The budget proposes to eliminate the scheduled change and maintain the current variable interest rate formula, allowing students and their families to take advantage of the historically low interest rate environment.

• Increased loan limits: To help students meet increasing higher education costs, the budget proposes to increase the limit for first-year students from $2,625 to $3,000. This limit has not been raised since 1986 and, when taking origination fees into account, has essentially remained unchanged since the early 1970s.

• More flexible repayment options: To standardize loan terms and help borrowers manage their debt, the budget proposes to standardize extended repayment terms in the FFEL and Direct Loan programs. Currently, many FFEL borrowers can only obtain these flexible terms by consolidating their loans.

• Improved program efficiency: Loans funded with the proceeds of tax-exempt securities originally issued before October 1, 1993, receive substantially higher special allowance payments than are currently paid on other types of loans. Loan holders are currently able to retain these higher benefits indefinitely by refinancing the underlying securities.

• Enhanced program stability: To assure equal terms for FFEL borrowers, as well as strengthen the financial stability of the guaranty agency system, the budget proposes to require guaranty agencies to collect the 1 percent insurance premium on all loans guaranteed or disbursed after October 1, 2004. Many agencies currently waive the fee, reducing Federal reserves against loan default.

• Streamlined program operations: Institutions with cohort default rates of less than 10 percent for the three most recent fiscal years would be exempted from requirements that loans to first-year students be delayed for 30 days prior to disbursement and that all loans be issued in at least two separate disbursements. In addition, student aid applicants who have been convicted of a drug-related offense would only be ineligible for Federal student aid if the student committed a drug-related offense while enrolled in higher education; incoming students, who are currently subject to the provision, would be exempted.

• Additional benefits: Beyond the proposals discussed above, the budget includes an additional $3 billion over ten years for unspecified further student benefits. These additional proposals—which could include reduced fees, default prevention activities, or additional loan limit increases—will be developed in consultation with Congress as part of the HEA reauthorization process.

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 accounts—hinders 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.

Vocational and Adult Education   Higher Education Programs

For further information contact the ED Budget Service.

This page last modified—February 2, 2004 (mjj).