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How Will the Election Results Affect Student Financial Aid?

Mark Kantrowitz

November 08, 2012

The American Opportunity Tax Credit (AOTC) expires at the end of 2012. This legislation expanded the Hope Scholarship tax credit from two years to four years, increased the credit from $1,800 to $2,500 and made the tax credit partially refundable. If the AOTC is not extended, the tax credit will revert to the terms of the Hope Scholarship tax credit, although the maximum tax credit may increase to $1,900 due to inflationary adjustments. Most likely the AOTC will be extended as part of a deal on the tax cuts, though perhaps not permanently as President Obama has proposed.

President Obama called for an $85 increase in the maximum Pell Grant in the FY2013 budget, from $5,550 to $5,635, as enacted by the Health Care and Education Reconciliation Act of 2010. That’s an anemic increase, coming after two years of no increases. But increases are better than cuts. Still, the Pell Grant program faces an $8 billion funding shortfall, which will have to come from somewhere. Both parties are treating student aid funding as a zero-sum game, where increases in one form of financial aid must come at the expense of other forms of financial aid. The most likely scenario involves eliminating subsidized interest on the subsidized Stafford loan for undergraduate students, which would save $6 billion a year. Given a choice between cutting the Pell Grant and cutting subsidized interest, eliminating the interest subsidy is the lesser of two evils. The rest of the funding might come from extending some of the eligibility restrictions from the Consolidated Appropriations Act of 2012 for an additional year.

The 3.4 percent interest rate on the subsidized Stafford loan to undergraduate students is unlikely to be extended beyond June 30, 2013. Given budget constraints and the $6 billion cost, Congress and the Obama administration are not likely to extend it further at the expense of the Pell Grant program. Also, next year is not an election year, so the pressure on Congress to extend the rate is reduced.

Reauthorization of the Higher Education Act

The Higher Education Act of 1965 is up for reauthorization in 2013. Reauthorization occurs every five or six years and often involves a major overhaul of federal student aid programs. But reauthorization might not occur in 2013, given the contentious environmen on Capitol Hill. The Higher Education Act of 1965 will be automatically extended for a year if it isn’t reauthorized in 2013. The last reauthorization was supposed to occur in 2003 but Congress passed 13 temporary extension bills until it was ultimately passed in 2008. Reauthorization might not take that long this time, but still the legislation may be reauthorized in a series of bills instead of one comprehensive bill.

President Obama has proposed using increases in campus-based aid to encourage colleges to slow tuition inflation. Campus-based aid includes the Perkins loan, Federal Work-Study and SEOG grant programs. While campus-based aid represents only 6 percent of federal student aid funding, it is the only form of aid that is under the college’s discretionary control, giving college financial aid administrators significant flexibility in allocating this funding. All other federal student aid functions like an entitlement.


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