Pell Financing Explained

The Pell Grant program is the United States' largest investment in grant aid to make college more affordable. In 2023, the program provided 6.5 million low- and middle-income undergraduate students an average of $4,831 to help cover college costs. Students with the lowest incomes, from families making less than around $30,000, were eligible for up to $7,395. The Pell program works like an entitlement: every student who applies and meets the eligibility criteria is guaranteed a grant. 

Despite the fact that the Pell functions as an entitlement for eligible students, Congress does not automatically allocate all of the funding needed for the program. Instead, each year during the appropriations process, Congress evaluates what funding is available for a variety of programs and decides how much money to send to the Pell program. This funding structure has led Congress to cut the generosity of Pell Grants in times of tight budgets and economic downturns—exactly when stimulatory spending and investments in future workers are most important. Over the years, Congress has created work-arounds to address flaws in Pell’s funding structure, yet, with Pell's financial position expected to worsen in the coming years, there is still a risk that Congress will cut investment in higher education.

The mix of Pell financing occurs at the student grant level. Each individual student’s Pell Grant is usually funded with part mandatory and part discretionary money.  As a result, Figure 1 could also represent the funding breakdown of the $4,831 average Pell Grant in 2023, which was funded from about three-quarters discretionary money. The blend of funding types within each Pell Grant has implications for Pell’s overall budget. It means, for example, that increasing the discretionary maximum Pell award also increases mandatory program costs. 

Mandatory and discretionary funds come from different pools of money and are accounted for separately unless Congress passes a law reappropriating funds. If Congress increases the costs of the Pell program, such as by raising the maximum Pell award, it has to find funding for the higher discretionary costs. If Congress generates “savings” by making cuts to a different program that uses mandatory funding, the savings can offset Pell’s mandatory funding needs but cannot lower Pell’s much larger discretionary funding needs. In order to fund the discretionary side, Congress has to allocate more money or cut funding for other discretionary programs during the annual appropriations process. 

For example, Congress recently introduced a bill allowing students enrolled in programs between 8 and 15 weeks long to receive Pell Grants. The Congressional Budget Office (CBO) estimated that extending Pell to very short-term programs would increase spending by $1.7 billion over 10 years, including $1.4 billion in discretionary costs and $0.3 billion in mandatory costs. The bill also changed student loans, a program financed with mandatory dollars, in a way which would save $2 billion in mandatory funding.

On the surface, it may seem that the mandatory savings from the loan program could cover the increase in costs from short-term Pell. But, because the savings from the student loan program would be on the mandatory spending side, they could only be used to offset mandatory costs. As a result, the savings would offset only the $0.3 billion mandatory costs of short-term Pell (see Figure 2). To cover the discretionary costs of short-term Pell, appropriators would still need to find $1.4 billion over 10 years in the annual appropriations process. This would be a difficult task in the tight budget environment predicted for the coming years, especially given calls for increasing the maximum Pell Grant and the caps on discretionary spending set in the Fiscal Responsibility Act of 2023.

The fact that all qualified students are entitled to a Pell Grant, but the program is not guaranteed most of its funding through mandatory money, creates policy and accounting headaches beyond the problem of finding pay-fors for program expansions. The funding structure leaves the Pell program vulnerable to cuts during budget disputes and recessions.  

Congress, which must rely on projections of future funding needs because the fiscal year starts well before the next Pell Grant award year, sometimes allocates more or less discretionary funding than is necessary, especially because the projections of Pell’s future funding needs are not always accurate. The Pell program can go into debt (a shortfall) or accumulate extra resources (a surplus). For some time, Pell was permitted to accumulate a shortfall with no restrictions. In the early 2000s, appropriators intentionally underfunded Pell for several years in a row, running up more and more debt. 

To address this ever-growing shortfall, Congress created the Pell Scoring Rule in 2006. The rule kicks in if Congress does not appropriate enough funds to cover next year’s Pell costs, as projected by the CBO, minus any surplus. Under the Pell Scoring Rule, even if Congress were to underfund Pell, the CBO would still count Pell’s discretionary costs as if Congress allocated the necessary amount. In other words, even if appropriators skimp on fully funding discretionary Pell, they cannot get more resources for other discretionary programs. The rule removes Congress’s incentive to appropriate less than the needed amount, making a large shortfall unlikely (unless CBO’s projected costs end up being much too low). However, the rule does not stop Congress from handling a projected shortfall by making Pell eligibility rules less expansive.

Historically, Congress has decided to cut students’ eligibility for Pell Grants when Pell’s surplus runs dry and a shortfall looms. During the Great Recession, out-of-work Americans flocked to college, and Pell costs spiked to new highs. Congress dealt with projected shortfalls partially by increasing funding, but also by making Pell less generous. For instance, in 2011, Congress eliminated the option for year-round Pell, which helped students, particularly community college students, make continuous progress toward their degrees. While Congress has since reinstated year-round Pell, it has never reversed some other cost-saving restrictions, like reducing the number of lifetime semesters a student can receive Pell from 18 to 12 semesters.

In the years following the Great Recession, college enrollments declined and Pell developed a comfortable surplus. But that surplus may soon be in jeopardy. The CBO anticipates a rise in Pell costs following the implementation of recent laws expanding Pell eligibility and streamlining the financial aid application process. Even with a bipartisan infusion of an extra $3 billion over fiscal years 2025 and 2026, the program could use up its surplus and enter a shortfall in several years if funding otherwise remains flat. Pell costs are only projected to continue to rise from there. If Congress does not allocate more discretionary funds—or switch to fully mandatory funding to secure permanent and automatic financing—Pell Grants, and the critical financial support they provide to low-income college students, may again be at risk.