Proposed Pell Grant Formula Explained

On Tuesday, the House Education and Labor Committee approved a bill that makes major changes to federal higher education assistance programs. The full House may vote on it as early as next week. At the core of the bill is one of President Obama’s priority education issues: shifting all federal student loans to the Direct Loan program, generating significant administrative savings that are redirected to expand student aid. The House, however, breaks with the President’s proposal on how the savings will be spent, particularly with respect to Pell Grants.

The Pell Grant program is the cornerstone of federal grant aid for low-income college students. In academic year 2008-09, eligible students received Pell Grants worth between $890 and $4,731 each to pay tuition and attendance costs.

In his budget request earlier this year, the President proposed shifting all student loan savings to the Pell Grant program, indexing grant levels to inflation, and making the program’s funding stream mandatory, rather than discretionary, like entitlement programs such as Social Security. This “mandatory funding” would remove Pell Grants from the annual appropriations process, solving a number of budgeting problems. The House proposal, however, does not quite accomplish these goals.

While the House bill does create a new mandatory funding stream, it would fund only a portion of the annual Pell Grant, rather than all of it, as the President proposed. Thus, the House bill still leaves most Pell Grant funding in annual appropriations. The new funding formula would provide $76 billion from 2011-2019, which includes $27 billion in mandatory Pell Grant funding already available through a 2007 law.

Here is how it would work. Starting in 2011, mandatory funds will become permanently available for Pell Grants. Annual funding growth would be tied to a maximum total grant of $5,550 in 2010 (a maximum discretionary grant of $4,860 plus the mandatory boost of $690), increased according to inflation plus 1 percentage point. An inflation rate of 1.4 percent, would make the 2011 level $5,683. The new mandatory funding formula, however, will provide only about $823 of that amount ($5,683 minus $4,860). The rest is contingent on fiscal year 2011 appropriations. In fact, in order for the inflation adjusted increase to take effect, appropriations legislation must fund a maximum grant of at least $4,860 each year.

Put another way, the mandatory funding portion is calculated each year by increasing the prior year grant by inflation, then subtracting $4,860. The difference is funded automatically through mandatory funding. In 2011, for example, the $823 portion of the grant dictated by the formula will be supported by an automatic $5 billion in mandatory funds, while the balance of $4,860 in discretionary funding is contingent on an appropriation of at least $18 billion.

What happens if an appropriation bill funds more than a $4,860 maximum grant? Under such a scenario, the total maximum grant level would be higher, and the inflation adjusted level in each future year would also increase, causing mandatory funding to rise as well. In short, an increase in the appropriated maximum discretionary grant leads to a further increase in mandatory funding in each future year.

On the other hand, if appropriation legislation cuts the discretionary grant level from $4,860, the portion of the grant supported by mandatory funding will not decrease. The total maximum Pell Grant that year, however, would be lower than the prior year due to the reduced appropriation. If the discretionary appropriation funded only a $3,000 grant in 2012, for example, then the calculation to determine the mandatory portion simply uses preceding year levels ($5,683 minus $4,860) to arrive at $823. Therefore, under this scenario, the total maximum 2012 grant would be $3,823.

To wrap up, the House student aid reform bill does indeed increase mandatory funding for Pell Grants, but it still leaves uncertain the maximum grant for which students will be eligible each year. While part of the program is now indexed to inflation, it by no means ensures students a rising Pell Grant each year. Ed Money Watch will continue following the legislation as it makes its way through Congress.