Congress established the Basic Educational Opportunity Grant Program, later renamed the Pell Grant program in 1980 after Senator Claiborne Pell (D-RI), in the 1972 reauthorization of the Higher Education Act. The program has since provided federal grant aid directly to financially needy undergraduate students to pay for the cost of attendance at any eligible institution of higher education. In the current fiscal year 2013, the Pell Grant program provided some 9 million students with aid at a cost of $33 billion. The program receives a larger share of the federal education budget than any other program.
The U.S. Department of Education awards Pell Grants to eligible students based on a needs-analysis formula in federal law. Grants are awarded to individual students on a sliding scale based on a student’s expected family contribution (EFC), the cost of attendance of the chosen university or college, and the student’s enrollment status (part-time or full-time). The Department of Education calculates a student’s EFC using financial information that she submits on the Free Application for Federal Student Aid (FAFSA). Generally, a student will receive a Pell Grant if her expected family contribution is less than the maximum grant that Congress has made available that year. Recipients received an estimated average Pell Grant of $3,678 for the 2012-13 school year when Congress had set the maximum grant at $5,645. Congress has set the maximum grant at $5,785 for the 2013-2014 school year.
Funding for the Pell Grant Program
Historically, Congress has funded the Pell Grant program entirely through the annual appropriations process whereby lawmakers establish a maximum grant level that a student may receive and then appropriate as a one-time sum that the Congressional Budget Office estimates to be the necessary funding based on that grant amount. Lawmakers must rely on cost estimates because Congress usually appropriates funding for education programs many months before a new school year begins and grants are awarded. This means that Congress can overfund or underfund the Pell Grant program if estimated costs at the time funding is provided are inaccurate. In such cases, the Pell Grant program accumulates a shortfall or a surplus.
A funding shortfall does not, however, force the Department of Education to reduce the grants for which students are eligible under law. Instead, the Department of Education has made it common practice to borrow funds from the subsequent year’s appropriation to cover a shortfall, and Congress has always appropriated the necessary funds to cover that shortfall. In years that a surplus accumulates, the Department of Education and Congress use the remaining funds to pay for grants in the upcoming school year. More information on this issue and related budget rules and procedures is available on the Pell Grant Budget Scoring Rule page.
A New Funding Approach
In 2007, Congress passed the College Cost Reduction and Access Act to create a new funding structure for the Pell Grant program that supplements the funding provided in the annual appropriations process. (Congress later modified this funding structure in 2010; see below.)
The 2007 law created a 10-year mandatory funding source (i.e. funding not provided through an appropriations bill) for Pell Grants totaling $33.6 billion through fiscal year 2017. The law established a supplemental Pell Grant award for each of the next ten years that would be added to a student’s regular grant award in a given year. In 2008, the first year the program was in effect, each student who was eligible for a Pell Grant of any amount received a uniform supplemental award of $490 under the new mandatory funding. In 2010 the amount increased to $690. In 2012, had Congress not modified the program, it would have increased to $1,090.
Lawmakers created this new funding structure after making changes to federal student loans that permanently reduced the cost of those programs. Congress opted to reallocate or “spend” those cost savings on the Pell Grant program. However, lawmakers did not want those funds to supplant annual appropriations that Congress would make in the future for Pell Grants, so they structured the new funding as a supplement to the annual appropriations.
Partial Entitlement Funding Added In 2010
Congress changed the mandatory funding stream for the Pell Grant program in the Health Care and Education Reconciliation Act of 2010. The law ended subsidies for private lenders making federally-backed student loans, permanently reducing the cost of the loan program again. Similar to 2007, Congress opted to reallocate or “spend” those cost savings on the Pell Grant program.
That 2010 law maintains a similar funding structure to the one created in 2007 – it uses mandatory funding to support a supplemental award for all Pell Grant recipients. However, the law awards the supplemental grants in the same manner as the portion of the grant funded through appropriations, not as a uniform add-on. The law limits the supplemental grants to $690 per recipient until 2013, at which point the supplemental award will increase annually until 2017 to account for inflation. Beginning in 2018, grants will no longer increase with inflation. Unlike the 2007 law, the 2010 law does not cap the mandatory funding available for the supplemental grant. The program can draw on as much funding as is needed to provide the supplemental funding each year and Congress does not need to provide an appropriation for this funding. It is important to note that under the current funding arrangement Congress established for Pell Grants in 2010, the majority of the grant is still funded annually through an appropriations bill. For 2013-2014 school year, mandatory funding is expected to comprise $785 of the maximum $5,645 Pell Grant. The balance of $4,860 in each year is funded through an annual appropriations bill.
Enrollment Growth and Eligibility Changes Amidst Budget Pressures
In 2008 and 2009 both the number of Pell Grant recipients and the cost of the program rose rapidly. This growth can be attributed to a combination of large increases in college enrollment and Pell Grant applications, the effect of a weak economy on applicants’ incomes and grant eligibility, broader eligibility rules that Congress passed in 2007 and 2008, and a substantial increase in the maximum grant that Congress included in the American Recovery and Reinvestment Act of 2009 (the economic stimulus bill).
Specifically, for the school years 2008-09 and 2009-10, the number of students receiving a Pell Grant increased by 13 percent and 27 percent, respectively. By comparison, increases in the four prior years never exceeded five percent. An estimated 9.7 million students are expected to receive Pell Grants in 2013, nearly double the number in 2006. These increases occurred at the same time changes to eligibility rules that Congress passed in 2007 and 2008 took effect. Those changes, which were included in the College Cost Reduction and Access Act of 2007 and the Higher Education Opportunity Act of 2008, increased the amount and types of income excluded from the Pell Grant eligibility formula, increased the income level under which an applicant automatically qualified for a maximum grant, and allowed students to receive more than one Pell Grant if they attended school year-round. Finally, as part of the American Recovery and Reinvestment Act, Congress approved a $619 increase in the maximum grant in 2009 and pledged to provide an $819 increase for 2010, compared to the maximum in 2008 of $4,731.
Taken together, these factors sent the cost of the Pell Grant program to $38.2 billion in fiscal year 2012 from $16.5 billion in 2008. Recent increases in the cost of the program have had a lasting effect, particularly as Congress and the Obama Administration have aimed to maintain the maximum grant level of $5,550 in fiscal years 2011 and 2012, a level that was first achieved in 2010 partly by using temporary funds from the American Recovery and Reinvestment Act of 2009, and to increase the maximum grant level to $5,645 in fiscal year 2013. However, Congress has not increased the annual appropriation for the Pell Grant program sufficiently to support the program’s higher costs. Instead, since 2010 lawmakers have allocated supplemental funding outside the appropriations process and changed eligibility rules for the program to reduce its costs and maintain a maximum grant of $5,550.
In 2010, Congress provided $13.5 billion in supplemental funding for Pell Grants as part of the Health Care and Education Reconciliation Act, funding that was offset by student loan reforms in that law. In 2011, Congress provided $3.2 billion in supplemental funding and reduced the costs of the program simultaneously by eliminating the year-round Pell Grant eligibility that was established in 2008. Again in 2011, Congress provided supplemental funding of $17 billion that would help fund the program in 2011, 2012 and 2013 as part of the Budget Control Act. Those funds were made available (“offset”) by a provision in the law that eliminated Subsidized Stafford loans for graduate students beginning in mid-2012. Finally, a fiscal year 2012 appropriations bill repealed and modified eligibility changes made in 2007 and 2008 to reduce the cost of the Pell Grant program and provided supplemental funding by temporarily suspending the grace period interest benefit on Subsidized Stafford loans for undergraduate borrowers for two years.
The table below details the various sources of funding Congress has used to support the Pell Grant program from 2008 through 2013 and what will be needed for fiscal years 2014 through 2016.
A 2013 Funding Surplus Aids Short-Term Budget Pressure
In 2013 the Congressional Budget Office reported that the Pell Grant funding Congress provided in recent years was more than enough to cover the costs of the program. The costs of the program in recent years proved to be lower than what the budget office originally projected. That led to an accumulated surplus in the program totaling $9.8 billion. The budget office later revised that figure to $11.0 billion in its preliminary 2014 estimate.
The surplus allows Congress to fund the Pell Grant program with the same appropriation it provided in 2013 for both fiscal years 2014 and 2015 without the need for additional supplemental funding or eligibility changes. An accounting rule allows lawmakers to roll prior year funding that was unused and apply it to a future year’s funding. Moreover, the surplus is large enough that the fiscal year 2016 appropriation needs to be only $1.0 billion larger than the 2015 appropriation (see table below), rather than the $5.8 billion that the budget office projected in its prior estimate.
Beginning in fiscal year 2017 and each year thereafter, however, the funding challenges for the Pell Grant program remain, although the most recent Congressional Budget Office estimates show a smaller funding gap that lawmakers will need address if they are to maintain the program at its current benefit level and eligibility rules. For example, the 2017 appropriation must include an increase of $3.4 billion, and Congress must sustain that higher level of funding on average each year.
|Pell Grant Funding and Award Level by Year|
|Funding by Source ($ billions)|
|Prior years' surplus||-||-||-||-||-||3.4||4.2||3.6||-|
|American Recovery and Reinvestment Act||13.5||4.2||-||-||-||-||-||-||-|
|2010 Student loan reform (one-time funds)||-||10.7||3.9||-||-||-||-||-||-|
|2011 year-round grant elimination||-||-||3.2||-||-||-||-||-||1.1|
|Budget Control Act||-||-||0.2||9.8||7.0||-||-||-||-|
|2012 Grace period interest subsidy elimination/other||-||-||-||0.6||0.6.||0.6||-||-||0.5|
|Maximum Grant ($)|
|Note: Appropriations prior to 2015 are law; figures for 2015 through 2017 reflect Congressional Budget Office estimates of the appropriation needed to fund the grant level shown at the bottom. All other funding sources are currently in law. Total funding row reflects what lawmakers made available, not the cost of the program, which was generally lower than the cost in recent years, particularly in 2012 and 2013, which results in the large surpluses available in 2014 through 2016.|