Impact of the Super Committee Stalemate on Federal Student Financial Aid - Fastweb

Impact of the Super Committee Stalemate on Federal Student Financial Aid

Mark Kantrowitz

November 22, 2011

On November 21, 2011 the Joint Select Committee on Deficit Reduction, also known as the super committee, announced that it had failed to reach an agreement to reduce the deficit. The super committee was charged with cutting the budget deficit at least $1.2 trillion over the next 10 years.

One side was unwilling to increase revenues while the other side was unwilling to decrease entitlement spending. But realistically, any agreement to reduce the deficit must do both. Both sides were too entrenched to settle on a compromise.

So what does this impasse mean for student financial aid?

The failure of the super committee to reach an agreement will trigger automatic spending reductions (sequestrations) starting in fiscal year 2013. The automatic cuts are split evenly between defense and non-defense spending. The amount of the spending cuts will be distributed proportionally within each account within each category. Congress could still act to reach a compromise before the automatic cuts kick in. Congress could not pass legislation to suspend the sequestration, since President Obama has promised to veto any measure that alters the sequestration while failing to achieve the mandated savings. Neither party has enough votes to override a veto.

Because the Budget Control Act of 2011 specified increases in Pell Grant funding for FY2012 and FY2013, most people assume that the Pell Grant will not be subject to automatic cuts in FY2013, so the maximum Pell Grant should remain at $5,550 in 2012-13. The Pell Grant will, however, be subject to automatic cuts in subsequent fiscal years. Other forms of federal student aid are not exempt and will be subjected to the automatic cuts starting in FY2013 instead of FY2014.

The Congressional Budget Office (CBO) has estimated that the automatic spending cuts will reduce most non-defense discretionary spending, such as federal student aid, by 7.8% in FY2013, 7.4% in FY2014, 7.1% in FY2015, 6.8% in FY2016, 6.6% in FY2017, 6.4% in FY2018, 6.1% in FY2019, 5.8% in FY2020 and 5.5% in FY2021. These cuts are in addition to the $900 billion reduction in discretionary spending caps from the Budget Control Act of 2011. (The discretionary spending caps are likely to lead to additional cuts in funding for student aid starting in FY2012.)

Thus, aside from the Pell Grant, the remaining $2.3 billion in annual federal student aid funding will be subjected to approximately $183 million in cuts in FY2013, of which about $138 million will occur in 2012-13. This includes cuts to Federal Work-Study, SEOG and TEACH Grant programs. The cuts will most likely be implemented by cutting the number of Federal Work-Study jobs and SEOG grants, not by cutting the average award, since the average award amounts are small (e.g., $1,642 and $716, respectively). This will affect about 150,000 students.

Since each award year spans the last quarter of the previous fiscal year and the first three quarters of the current fiscal year, the maximum Pell Grant will be cut by approximately $310 in 2013-14 and $400 in 2014-15, with similar cuts in subsequent years. This will affect approximately 9 million students.

The automatic cuts will also affect student financial aid awarded through other agencies besides the US Department of Education. The Department of Defense awards a variety of scholarship and fellowship programs, as does NSF, NASA, NIH and EPA, among others.

However, the Bush Administration tax cuts will expire at the end of 2012. If these tax cuts are not extended, that would yield enough of a revenue increase to eliminate the need for automatic spending cuts. A failure to extend the tax cuts, however, would also affect certain education tax benefits, such as the American Opportunity Tax Credit’s improvements to the Hope Scholarship Tax Credit, certain enhancements to the Coverdell Education Savings Accounts and the suspension of the 5-year limit on the student loan interest deduction.

Thus the final impact of the sequestration may depend on the outcomes of the next election. If President Obama is reelected, or the Democrats maintain a simple majority in the Senate or gain a majority in the House of Representatives, they will be able to block legislation to extend the tax cuts. The Republicans would need to win the White House, maintain their majority control of the House of Representatives and also gain at least a simple majority in the Senate to be able to pass spending cuts without revenue increases.

(A supermajority would be required to block filibusters in the Senate. But control over the composition of conference committees may allow the majority party to insert provisions into the conference bills that reconcile differences between the House and Senate versions of legislation. These conference bills are then subjected to a strict up or down vote.)

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