Potential Impact of the Fiscal Cliff on Federal Student Financial Aid

The Budget Control Act of 2011 enacted automatic across-the-board spending cuts in the federal budget if Congress in unable to achieve specified reductions in overall spending on its own. This process is called sequestration.

The White House’s Office of Management and Budget released a 394-page report on Friday, September 14, 2012, detailing the specific budget lines in the FY2013 budget that will be cut and by how much. The 2013 fiscal year begins on October 1, 2012.

Certain financial aid programs are exempt from sequestration. The Pell Grant program is exempt because the Budget Control Act of 2011 specified funding levels for the program for FY2012 and FY2013. The Pell Grant program may be subject to sequestration in FY2014 and subsequent years, which could lead to a $310 cut in the maximum Pell Grant in 2013-14 and $400 in 2014-15.

Other financial aid funding in fiscal year 2013 will be subject to sequestration. Discretionary funding will be cut by 8.2 percent and mandatory funding will be cut by 7.6 percent.

The Office of Postsecondary Education (OPE) will lose $186 million in funding. OPE provides funding for the TRIO and GEAR UP programs, Javits fellowships, graduate assistance in areas of national need and college access challenge grants, as well as aid for institutional development.

The Office of Federal Student Aid (FSA) will lose $140 million in funding. Besides the Pell Grant program, FSA provides funding for the Federal Supplemental Educational Opportunity Grants (SEOG), Federal Work Study (FWS), LEAP, TEACH Grants and the Perkins Loan. In all likelihood the cuts would be implemented by reducing the number of students who benefit from these programs, as opposed to the average amount per student.

There will also be cuts in student aid administration, which will affect staff salaries and benefits. Funding for debt collection will be cut by $1 million.

Sequestration will also involve an increase in revenues from new student loans. The fees on new Stafford loans will be increased from 1% to 1.1% and the fees on new PLUS loans will be increased from 4% to 4.3%, yielding $91 million in additional revenue.

In addition to sequestration, there are some education tax benefits that are expiring at the end of calendar year 2012. These include the American Opportunity Tax Credit (AOTC), improvements in the Coverdell Education Savings Accounts and the suspension of the 5-year limit on the student loan interest deduction.

If the AOTC is not extended, the tax credit will revert to the provisions of the Hope Scholarship tax credit. This includes a maximum tax credit of $1,800 (possibly increasing to $1,900 due to inflationary adjustments), a 2-year limit instead of a 4-year limit, an end to partial refundability and a reduction in the income phaseouts.

If the improvements to the Coverdell program are not extended, families will no longer be able to use Coverdell education savings accounts to pay for K-12 expenses in addition to higher education expenses. The annual contribution limit will decrease from $2,000 to $500. Income phaseouts would be reduced.

See also Impact of the Super Committee Stalemate on Federal Student Financial Aid.

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