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FY 2007 Budget Summary
Summary of the 2008 Budget
Elementary and Secondary Education
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Programs Proposed for Elimination
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Fiscal Year 2008 Budget Summary — February 5, 2007

Section II. D.  Student Financial Assistance


In 2008 the Department of Education will administer over $90 billion in new grants, loans, and work-study assistance to help over 11 million students and their families pay for college. The request includes more than $15 billion in Pell Grants to nearly 5.5 million students, or 200,000 more than the 2007 level, and increases the maximum award by a record $550, to $4,600. The budget also includes $73 billion in guaranteed and direct student loans. Federal student aid funds will help millions of Americans obtain the benefits of postsecondary education and play a vital role in strengthening our Nation by providing advanced training for today's global economy.

The September 2006 report of the Secretary's bipartisan Commission on the Future of Higher Education emphasized the need for improved access, affordability, and accountability in American higher education. In particular, the Commission's report highlighted the impact of rising college costs on the ability of low-income families to pay for postsecondary education. For the poorest quarter of the population—those families earning $19,000 annually—the percent of a family's income needed to attend a public 4-year college increased to 47 percent in 2004 from 41 percent in 1992. By contrast, families earning $75,000 a year in 2004 would have needed to spend 18 percent of their annual income to send a child to college.

The 2008 President's Budget addresses these concerns by proposing substantial new investments in need-based grants that would target limited Federal resources to students most affected by the tuition increases of the last 15 years. The request is based on a three-pronged strategy:

  • Increased Federal investment in the Pell Grant program. The President proposes the largest funding increase ever in the Pell Grant program, raising the maximum grant by $550 to $4,600 in 2008. The maximum Pell Grant would increase by $200 annually from 2009 through 2012, to $5,400. The 2008 maximum would allow needy students—including part- time and older students—to pay all tuition and fees at an average public community or technical college, and 75 percent of the tuition at an average public 4-year institution.

  • In 2008, a combination of increased ACG awards and the higher maximum Pell Grant would cover all tuition and fees and provide up to $4,000 in living expenses for community college students, while sophomores at an average 4-year public institution would receive enough grant assistance to pay all tuition and fees. More valuable Academic Competitiveness Grants (ACG). To complement the Administration's No Child Left Behind reauthorization package, which includes proposals to increase the rigor of high schools, the President proposes to increase grant levels by 50 percent for students completing a challenging course of study in high school. These substantially higher awards will encourage States and local school districts to raise their standards and improve the quality of their course offerings. They will also encourage students to graduate on time and complete the challenging classes necessary to ensure success in postsecondary education.

  • Early notification efforts. More valuable Pell Grant and ACG awards give all States and institutions the opportunity to inform low- and moderate-income students that if they complete high school and work hard, they will have access to substantial resources to pay for college. The Administration is developing administrative and other proposals to make students and their families more aware of their eligibility for financial aid and how best to prepare academically and financially for college.

These three prongs complement one another: students and families who are convinced that college is within reach financially will work hard to prepare academically, and will demand more rigorous instruction from their secondary schools; such students will then have the skills to take full advantage of higher grant assistance to succeed in postsecondary education without incurring excessive debt. In addition, for these proposals to be effective, institutions must do their part to keep tuition increases moderate.

The request would help pay for these new investments by reducing subsidies to lenders and eliminating duplicative programs, consistent with the Commission's call for greater simplicity and efficiency in the student aid programs.

Student Aid Summary Tables

Budget Authority ($ in millions)
2006   2007   2008
Pell Grants            
   Discretionary funding $13,045.2   $12,606.7 1 $13,223.0 1
   Mandatory funding 4,300.0     2,216.0  
   Subtotal, Pell Grants
Supplemental Educational
  Opportunity Grants
770.9   770.6    
Work-Study 980.4   980.5   980.5  
Leveraging Educational Assistance
65.0 2 64.5 2  
Academic Competitiveness Grants/
  SMART Grants
790.0   850.0   1,180.0  
Federal Family Education Loans 28,067.7 3 2,700.7 3 1,057.0 3
Federal Direct Loans 6,191.3 4 4,191.8 4 509.2 4
Perkins Loans Cancellations 65.5   65.5  

   1Discretionary amount for 2007 assumes use of $138.6 million in surplus funds originally appropriated in 2006 to support grants in award year 2007-2008 under the scoring rule included in the 2006 Congressional Budget Resolution. Discretionary amount for 2008 assumes use of $235.4 million to fund shortfall from previous year.
   2Includes $35.0 million in 2006 and $34.5 million in 2007 for Special LEAP.
   3Budget authority requested for FFEL does not include the Liquidating account. The 2006 amount includes a net upward re-estimate of $9.1 billion primarily related to revised interest rates. The 2006 amount also includes a $1.7 billion upward modification to reflect the effect of the Higher Education Reconciliation Act on existing loans. The 2007 amount includes a net downward re-estimate of $3.2 billion primarily related to revised assumptions for interest rates, loan volume, and default collection costs. The 2008 amount includes a net downward modification of $2.8 billion related to proposed policies.
   4For 2006, the amount includes a net upward re-estimate of $4.4 billion primarily related to interest rates and increased use of loan deferments, as well as a $7 million upward modification to reflect the effect of the Higher Education Reconciliation Act on existing loans. The 2007 amount includes a net upward re-estimate of $3.7 billion primarily related to revised assumptions related to interest rates and collections on defaulted loans.

Aid Available to Students
($ in millions)
2006   2007   2008
Pell Grants $12,881   $12,954   $15,176  
Supplemental Educational
  Opportunity Grants
976   975    
Work-Study 1,175   1,175   1,175  
Leveraging Educational Assistance
165 1 165 1  
Academic Competitiveness Grants 340   420   830  
SMART Grants 310   310   350  
New Student Loans:            
  Federal Family Education Loans 47,307   52,402   57,845  
  Federal Direct Loans 12,677   13,596   15,050  
Perkins Loans 1,135   1,105  
Subtotal, New Student Loans

   1Reflects only the LEAP program's statutory State matching requirements.
   2In addition, consolidation loans for existing borrowers will total $91 billion in 2006, $31 billion in 2007, and $37 billion in 2008.
   3Shows total aid generated by Department programs, including Federal Family Education Loan capital, Perkins Loan capital from institutional revolving funds, and institutional and State matching funds.

Number of Student Aid Awards
(in thousands)
2006   2007   2008
Pell Grants 5,165   5,274   5,478  
Supplemental Educational
  Opportunity Grants
1,291   1,290    
Work-Study 880   880   880  
Leveraging Educational Assistance
165 1 165 1  
Academic Competitiveness Grants 400   497   662  
SMART Grants 80   82   93  
New Student Loans:2            
  Federal Family Education Loans 10,982   11,496   11,906  
  Federal Direct Loans 2,841   2,839   2,935  
Perkins Loans 514   501  
Total awards

   1Reflects only the LEAP program's statutory State matching requirements.
   2In addition, consolidation loans for existing borrowers will total 3,377 in 2006, 1,192 in 2007, and 1,337 in 2008.

Number of Postsecondary Students Aided by Department Programs

  2006 2007 2008
Unduplicated Count (in thousands) 10,409 10,766 11,076

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 2008, students and families will save an estimated $3.4 billion under the HOPE tax credit, which allows a credit of up to $1,500 for tuition and fees 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 for undergraduate and graduate tuition and fees; and $820 million in above-the-line deductions for interest paid on postsecondary student loans.

Pell Grants

  2006 2007 2008
B.A. in millions      
   Discretionary $13,045 $12,607 $13,223
   Mandatory (proposed policy) 2,216
   Mandatory (retirement of
     prior-year shortfall)


Program costs ($ in millions) 12,907 12,981 15,203
Aid available ($ in millions) 12,881 12,954 15,176
Recipients (in thousands) 5,165 5,274 5,478
Maximum grant $4,050 $4,050 $4,600
Average grant $2,494 $2,456 $2,770

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 President proposes to increase the maximum Federal Pell Grant to $4,600 in 2008 and to $5,400 by 2012, dedicating $19.8 billion over 5 years to increase the maximum Pell Grant by $550 in 2008 and $200 annually through 2012. Under the request, the $4,600 maximum grant awarded to the poorest students would cover nearly 75 percent of tuition and fees at a typical public 4-year college, while the average award of $2,770 would pay for 42 percent of tuition and fees.

This bar graph shows that under the 2008 President's Request, the Pell Grant maximum award will grow from $4,050 to $4,600 in 2008, and by $200 each subsequent year, reaching $5,400 in 2012.

To emphasize the Federal commitment to ensuring that funds will be available to pay for higher Pell Grant awards—a key to promoting awareness of Federal student financial assistance to low-income families, the Administration is proposing to fund the grant increase with savings from the mandatory student loan programs. The 2008 request would provide $13.2 billion in discretionary "foundation" funding for the current $4,050 maximum grant and $2.2 billion in mandatory funds for the $550 grant increase.

While Pell Grants have been very successful in expanding access to postsecondary education for low-income students, the Administration plans to work with Congress to increase the program's effectiveness and improve its overall operation. Accordingly, the 2008 Budget includes the following proposals:

  • Pell Grants would be made available year-round at eligible 2- and 4-year degree granting institutions, giving students a more convenient option for accelerating their studies and promptly completing their education.

  • As a further incentive for timely completion, and to eliminate an area of potential abuse, Pell Grant eligibility would be limited to the equivalent of 16 semesters.

  • The Administration proposes to eliminate the Pell Grant award rule related to tuition sensitivity. This rule limits the amount of support that students with greatest need receive while attending low-cost institutions.

  • To encourage families to save for college, the Administration proposes to exclude amounts held by students and parents in Section 529 savings and investment accounts from the statutory need analysis methodology used to determine financial need.

  • To ensure Federal Pell Grant funds are properly used, the Department and the Internal Revenue Service intend to implement a consent-based approach to matching applicant data reported on the Free Application for Federal Student Aid with Federal tax data.


  2006 2007 2008
B.A. in millions $980 $980 $980
Aid available ($ in millions) 1,175 1,175 1,175
Recipients (in thousands) 880 880 880
Average award $1,335 $1,335 $1,335

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 balance of the student's wages. At the request level, over 880,000 students would receive more than $1 billion in award year 2008-09. 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.

Academic Competitiveness Grants/SMART Grants

  2006 2007 2008
B.A. in millions $790.0 $850.0 $1,180.0
Academic Competitiveness Grants      
   Recipients 400,000 497,000 662,000
   Aid available to students (in 000s) $340,000 $420,000 $830,000
   Maximum grant (in whole $)      
     First-year student $750 $750 $1,125
     Second-year student $1,300 $1,300 $1,950
   Average grant (in whole $) $850 $845 $1,254
SMART Grants      
   Recipients 80,000 82,000 93,000
   Aid available to students (in 000s) $310,000 $310,000 $350,000
   Maximum grant (in whole $) $4,000 $4,000 $4,000
   Average grant (in whole $) $3,875 $3,780 $3,763

These programs started in 2006 and award need-based Academic Competitiveness Grants (ACG) to first- and second-year undergraduates who complete a rigorous high school curriculum, and National Science and Mathematics Access to Retain Talent (SMART) Grants to third- and fourth-year undergraduates majoring in physical, life, or computer sciences, mathematics, technology, engineering, or a critical foreign language. All funding is mandatory so annual discretionary appropriations are not required.

In order to be eligible for either grant, a student must be a United States citizen and eligible for a Federal Pell Grant. A first-year recipient is also required to be a first-time undergraduate, enrolled or accepted for enrollment in a 2- or 4-year degree granting institution, and have completed a rigorous secondary school program. Second-year undergraduates are required to have completed such a rigorous program and to maintain a cumulative grade point average of at least 3.0 during their first year as an undergraduate. The Secretary of Education recognizes at least one rigorous program of study in each State.

Third- and fourth-year undergraduates are required to pursue a major in physical, life, or computer sciences, mathematics, technology, engineering or a critical foreign language, and obtain a cumulative GPA of at least 3.0 in the coursework required for the major being pursued. Critical foreign languages are determined by the Secretary of Education in consultation with the Director of National Intelligence.

Grants of $750 are awarded to first-year undergraduate students, $1,300 for a second-year undergraduate, and $4,000 for third- and fourth-year undergraduates, except that these grants, in combination with the Federal Pell Grant and other student financial assistance, cannot exceed the student's cost of attendance.

The 2008 request would invest an additional $1.0 billion over 5 years to increase first- and second-year ACG awards by 50 percent, to $1,125 and $1,950, respectively, to provide a more significant incentive to needy students to take a rigorous high school curriculum and work hard in college. Combined with the maximum Pell Grant, the higher ACG awards would cover 86 percent of tuition and fees for freshmen and all tuition and fees for sophomores at the average public 4-year college. At a public 2-year institution, the combination would cover tuition and fees and provide living expenses of $3,000 for freshmen and nearly $4,000 for sophomores.

Federal Family Education Loans and Direct Loans

  2006   2007   2008
Federal Family Education Loans            
  New Loan Subsidies (BA) $17,273.8 1 $5,860.3 1 $3,861.4 1
  Modification of Existing Loans 1,709.5 2   -2,804.4 2
  Net Re-estimate of Prior Loans 9,084.3 3 -3,159.6 3  
     Total, FFEL Program BA
Direct Loans            
  New Loan Subsidy (BA) 1,806.6 4 474.2 4 509.2 4
  Modification of Existing Loans 7.3 2    
  Net Re-estimate of Prior Loans 4,377.5 3 3,717.6 3  
     Total, New Budget Authority
     Total, Student Loans (BA)

   1Total includes amount for Consolidation Loans, but does not include the Liquidating Account, which deals with costs associated with loans made prior to 1992.
   2Under Credit Reform, costs or savings related to the impact of policy changes on existing loans are reflected in the current year. Amounts for 2006 reflect the impact of the Higher Education Reconciliation Act on existing loans. The amount for 2008 reflects proposed policies.
   3Under Credit Reform, the subsidy amounts needed for active loan cohorts are re-estimated annually in both Direct Loans and FFEL to account for changes in long-term projections. In 2006 and 2007, the Direct Loans re-estimates primarily reflect revised interest rate assumptions, and in 2007, revised default collection estimates. The FFEL re-estimates are driven primarily by updated interest rate, loan volume, and default collection cost assumptions.
   4Total includes amount for Consolidation Loans.

New loan volume (in millions)

  2006   2007   2008
  Federal Family Education Loans $47,307   $52,402   $57,845  
  Direct Loans 12,677   13,596   15,050  

Number of new loans (in thousands)

  2006   2007   2008
  Federal Family Education Loans 10,982   11,496   11,906  
  Direct Loans 2,841   2,839   2,935  

   1In addition, Consolidation Loans for existing borrowers will total $91 billion and 3.4 million loans in 2006, $31 billion and 1.2 million loans in 2007, and $37 billion and 1.4 million loans in 2008.

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 3,200 private lenders. There are 35 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 79 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 21 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 on Stafford loans made before July 1, 2006, is adjusted annually based on the 91-day Treasury bill rate, with a cap of 8.25 percent. For loans made on or after July 1, 2006, interest rates are fixed at 6.8 percent.

  • Unsubsidized Stafford Loans are offered at the same rate 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 Higher Education Reconciliation Act (HERA) expanded eligibility for PLUS loans to graduate and professional students.

  • 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 1 percent. The resulting rate for the consolidated loan is then fixed for the life of the loan.

The 2008 Budget proposes a range of policies to increase aid to students, increase program efficiency, and reduce unnecessary or excessive subsidies in order to focus limited Federal resources on aid to needy students. These proposals would:

  • Increase the annual amount of student loans juniors and seniors can borrow by $2,000, to $7,500. This proposal will help students fund the increasing cost of higher education, which over the past decade has grown at more than twice the general national inflation rate. The HERA increased the maximum loan amounts for freshmen, sophomores, and graduate students but did not make similar changes for juniors and seniors, limits for whom have not increased since 1992. The proposal also increases aggregate loan limits for all students. The 5-year cost of this investment is $1.1 billion.

  • Reduce interest subsidies to lenders by ˝ percent. FFEL private lenders are guaranteed a specified interest rate by law, regardless of what the student borrower pays. Currently, private lenders are guaranteed an interest rate equal to the commercial paper rate plus 2.34 percent on student and parent loans (the current rate on most student loans is 7.72 percent). Reducing this subsidy above the commercial paper rate from 2.34 percent to 1.84 percent would save an estimated $12.4 billion over 5 years that would be redirected to the Pell Grant program, thus targeting public investments more effectively.

  • Reduce default insurance from 97 percent to 95 percent. FFEL lenders currently receive 97 percent of students' loan balances when filing for Federal insurance. Given that the Government compensates private lenders for interest unpaid by students—accruing 6.8 percent a year on new loans—the current 3 percent "risk-sharing" is illusory. Reducing the default guarantee (including a 2 percentage point reduction for lenders deemed "exceptional performers") would reduce this disincentive and save $1.6 billion in Federal funds over the next 5 years that would be redirected to need-based grant assistance.

  • Reduce guaranty agency default collection payments. The Department of Education pays its collection contractors roughly 16 cents on each defaulted dollar collected. For similar collections—those not made through consolidation or rehabilitation—FFEL guaranty agencies retain 23 cents from each defaulted dollar they collect. The Administration proposes to reduce the amount guaranty agencies may retain from collections on defaulted loans beginning in 2008 to the average paid to the Department's private collection agents, releasing $2.3 billion over 5 years for reinvestment in aid to needy students.

  • Move guaranty agency account maintenance fees to a unit cost basis. Agencies currently are paid an administrative fee based on the original principal amount of active loans they have guaranteed. To encourage agencies to operate more efficiently, the Administration proposes to shift the basis for this fee to a unit cost payment tied to the number of accounts each agency manages, thus reducing program costs by $1.6 billion over 5 years.

  • Increase consolidation lender fee to 1 percent. Lenders making Consolidation Loans currently pay the Department a one-time fee of 0.5 percent of the loan balance. Because consolidations tend to be high-dollar, low-risk loans, they have the potential to be significantly more profitable for private lenders than other student loans. Increasing this fee to 1 percent would reduce Federal costs by $850 million over 5 years.

In addition to these proposals affecting the FFEL and Direct Loan programs, the Administration is proposing to recall the Federal portion of the Perkins Loans revolving fund currently held by participating institutions. The Administration believes these balances, which will total $3.2 billion over fiscal years 2008-2012, would be better used to support increases in need-based grants.

Career, Technical, and Adult Education  Table of contents  Higher Education Programs

For further information contact the ED Budget Service.

This page last modified—February 5, 2007 (mjj).