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Sequestration Cuts Federal Student Aid Funding

Mark Kantrowitz

March 04, 2013

Congress did not reach an agreement to reduce the FY2013 budget deficit on March 1, 2013. Accordingly, the automatic across-the-board budget cuts known as sequestration will become effective on March 27, 2013, cutting funding for some federal student aid programs for the remainder of the FY2013 budget year and 2013-14 award year.

The US Department of Education has issued preliminary guidance to colleges about the impact of FY2013 sequestration on federal student aid. [This article has been updated to reflect updated guidance published on March 15, 2013.]

The US Department of Education is interpreting the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA), as amended by the Budget Control Act of 2011 (BCA), as exempting the Pell Grant program from the automatic across-the-board cuts for 2013-14. The Pell Grant program is not, however, protected in subsequent years.

Other federal student financial aid programs will be cut by about 5%.

The Federal Work-Study (FWS) and Federal Supplemental Educational Opportunity Grant (FSEOG) programs will be cut by $89.5 million for 2013-14, a 5.52% decrease. These cuts will most likely be manifested in cuts in the number of awards as opposed to the average award. This may result in about 33,000 fewer FWS awards and 71,000 fewer FSEOG grants. It is possible that the US Department of Education may let colleges decide whether to cut the number of awards or the average award.

The loan fees for Federal Direct Stafford loans will increase from 1.0% to 1.051% and the loan fees for the Federal Direct PLUS loan (including both Parent PLUS and Grad PLUS loans) will increase from 4.0% to 4.204%. These increases apply only to loans that are first disbursed after the sequester takes effect. Second disbursements of previously disbursed loans will not be affected.

The amount of awards made under the Iraq-Afghanistan Service Grant (IASG) and TEACH Grant programs will be reduced. Again, the grant reductions apply only to awards with a first disbursement after the sequester takes effect. The reduction in the Iraq-Afghanistan Service Grant is 37.8% of the award amount the student is otherwise eligible to receive, not the maximum award amount. Similarly, the reduction in the TEACH Grant is 12.6% of the actual award amount.

There may also be indirect cuts in student aid funds. Federal research grants, which are a source of funding for graduate students, will also be cut by sequestration. Cuts in federal support of postsecondary education may put additional pressure on college and university student aid budgets.

If sequestration continues into FY2014, the budget cuts next year will be more severe.

Prospects for avoiding sequestration in FY2014 are slim, with the start of FY2014 just 6-7 months away on October 1, 2013. Now that Congress has jumped off the fiscal cliff once, fear of the fiscal cliff will not be as effective in motivating Congress to act. Across-the-board budget cuts are a blunt instrument as compared with more selective cuts. But members of Congress who are opposed to tax revenue increases might prefer such cuts over the alternative. The American Taxpayer Relief Act of 2012 took the expiration of Bush-era tax cuts off the table, eliminating a source of leverage for proponents of tax increases. There might not be any movement on sequestration until the midterm Congressional elections in 2014, depending on how voters react to the impact of sequestration.


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