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The American Recovery and Reinvestment Act of 2009 includes a Big Boost in Student Aid Funding

The stimulus package increases federal student aid funding

Mark Kantrowitz

April 21, 2009

The American Recovery and Reinvestment Act of 2009 includes a Big Boost in Student Aid Funding
The American Recovery and Reinvestment Act of 2009, also known as the stimulus bill, includes major increases in student aid funding for the 2009-10 academic year. It includes the largest dollar increase ever in the maximum Pell Grant and significantly expands the Hope Scholarship tax credit. It also increases funding for the Federal Work-Study and AmeriCorps programs. The legislation was signed into law by President

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Obama on February 17, 2009.

The stimulus bill increased the maximum Pell Grant from $4,731 in 2008-09 to $5,350 in 2009-10, a $619 increase. An additional 800,000

students will qualify for the Pell Grant, bringing the number of recipients to about 7 million. The minimum Pell Grant will be $976 for students with an expected family contribution of $4,617.

The increase in the maximum Pell Grant will also expand eligibility for the Academic Competitiveness and National SMART grants since these programs require recipients to be eligible for the Pell Grant. The number of recipients will increase by more than 60,000 students (approximately 13%). The Academic Competitiveness Grants provide $750 to college freshmen and $1,300 for college sophomores who completed a rigorous high school curriculum and maintained a 3.0 GPA. The National SMART Grants provide $4,000 a year to college juniors and seniors who major in mathematics, science, engineering, technology and critical foreign languages and maintain a 3.0 GPA.

The stimulus bill also included the American Opportunity Tax Credit, which significantly expands the Hope Scholarship tax credit for the 2009 and 2010 tax years. The maximum credit is increasing to $2,500 from $1,800 and consists of a tax credit for 100% of the first $2,000 and 25% of the second $2,000 in qualified tuition and related expenses. The credit will be allowed for the first four years of postsecondary education instead of just two years. The definition of qualified tuition and related expenses now includes course materials, such as textbooks, in addition to tuition and fees. The income phaseouts have expanded to $80,000 for single filers (fully phased out at $90,000) and $160,000 for married filing joint (fully phased out at $180,000), and the credit is no longer subjected to the Alternative Minimum Tax (AMT). The credit is partially refundable for the first time, meaning that up to $1,000 (40%) of the tax credit may be refunded to taxpayers. Previously taxpayers were limited to using the tax credit to offseting a tax liability. If the tax credit exceeded the tax liability, the taxpayer would lose the excess credit. (Note that dependent children are not eligible for refundability, so parents cannot double-dip by having their children claim the credit too.)

Other student aid provisions enacted by the stimulus bill include:

  • Families can use section 529 college savings plans to purchase computer technology and equipment in 2009 and 2010. This includes the cost of internet access and software, but excludes non-educational software for sports, games or hobbies. The student must be the primary user of the equipment. (Previously families could purchase a computer with their 529 plan funds only if the computer were required by the college.)
  • The legislation increases federal funding for the Federal Work-Study program by $200 million, enough for an additional 181,000 work-study jobs when college matching funds are included.
  • The stimulus bill adds $200 million in additional funding for the AmeriCorps program. The AmeriCorps program provides educational awards to students who volunteer on community service projects.
  • The bill establishes a State Fiscal Stabilization Fund with $53.6 billion in funding, of which 81.8% must be used for support of elementary, secondary and postsecondary education. Any states that accepts this funding must agree to maintain their support for higher education (excluding capital projects, research & development, and funds from tuition and fees) at 2006 levels or better during 2009, 2010 and 2011. Several states will use part of their funding to limit increases in public college tuition, which otherwise would have been growing by 10% or more.

The main problem with these improvements in student aid funding is that they are temporary. The increase in Pell Grant funding is just for the 2009-10 academic year and the expansion of the Hope Scholarship is just for the 2009 and 2010 tax years.

However, President Obama has proposed making the these changes permanent in his FY2010 budget. The maximum Pell Grant would be increased to $5,550 in 2010-11 and further increases would be indexed to inflation plus 1% in 2011-12 and beyond. The expansion of the Hope Scholarship would be made permanent. The AmeriCorps program would have a significant further increase in funding, enough to increase the number of educational awards from 75,000 to 250,000 by FY2017 and the maximum award would be increased from $4,725 to $5,350 (and pegged to the maximum Pell Grant in subsequent years).

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