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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