Looming Cuts to Pell Grants Threaten College Students and U.S. Competitiveness

pell grantsPresident Obama's new 2012 budget will seek to cut $100 billion in Pell Grant funding -- a plan that spells yet another blow to free federal aid for America's most financially needy college students.

It's all part of a $3.73 trillion budget the Obama administration unveiled today for 2012.

While the final details still have to be approved by Congress -- and pass muster with Republicans -- it appears certain that current and future students attending college in the U.S. can expect far less financial support from the government to pursue higher education.

And if the GOP has its way, even further cuts to the Pell Grant program are in store.The current annual maximum for Pell Grants is $5,550.

According to the Associated Press, the President's 2012 budget proposal would preserve the maximum Pell Grant amount of $5,550 by suspending year-round Pell Grants and by eliminating subsidized interest on subsidized Stafford loans to graduate and professional students.

Students would no longer be able to secure Pell Grants in the summer. Additionally, students receiving government-backed loans would see those loans treated more like private loans.

Both moves are significant. But the latter proposal would perhaps have the greatest long-term financial impact on students and their families. In essence, the government wants to have interest on federal loans for graduate students start accruing immediately -- not after a student graduates, as is currently the case.

The net effect of the government taking away the subsidy on loans is that more people will graduate with higher levels of student-loan debt. The average college graduate in America already leaves school with more than $23,000 in student loans, according to the College Board.

But that long-term hit is not the only financial pang students are likely to feel. Near-term cuts to the Pell Grant system could also be on the horizon.

Late Friday, Republican leaders in the House of Representatives released a proposal of their own that called for Pell Grants to be slashed by 15% to a maximum of $4,705.

So it's clear that the Republicans and Democrats will have to reconcile their differences and determine a mutually agreeable level of funding for Pell Grants.

Pell Grants are need-based awards. About 97% of those receiving Pell Grants come from families earning less than $50,000 a year.

In the 2008-2009 academic year, about 6.2 million students received $18.3 billion in Pell Grants. But as college costs continue to skyrocket, an increasing number of young students -- as well as older, jobless Americans going back to school -- are counting on the Pell Grant program to help fund their educations. For the current 2010-2011 academic year, the government expects to provide $32 billion in Pell Grants to 8.4 million students.

A Threat to America's Education Goals and Competitiveness

A year ago, when President Obama pushed for a major student loan reform bill, one primary goal of the legislation was to prop up the Pell Grant program.

In advocating for the bill, Obama administration officials originally projected a savings of $87 billion -- and most of that money was supposed to go to funding Pell Grants. But in the final version of the bill, only $43 billion got earmarked for education programs, with $36 billion going to Pell Grants.

According to Mark Kantrowitz, publisher of the financial aid website FastWeb.com, $20 billion of the savings from eliminating the federally-guaranteed student loan program in 2010 was used for deficit reduction. "If that money had instead been used to stabilize the Pell Grant program, there would not only not be a funding shortfall," he says, "but there'd probably be enough money to turn the Pell Grant program into a true entitlement with a maximum grant indexed to 1% over the inflation rate."

In his opinion, cutting college funding is short-sighted and will ultimately hurt the economy and America's competitiveness in the global marketplace.

"Given a choice between cutting need-based grants and loans, loans should be cut first. But instead of cutting student aid, we should be expanding it," says Kantrowitz.

Kantrowitz says that getting rid of the subsidy on loans is preferable because it's will have "no impact on (college) access, retention or completion."

On the other hand, he warns that decreased aid to the Pell Grant system could be extremely damaging for America.

"The combination of cuts to the Pell Grant and double-digit tuition inflation at public colleges will cause hundreds of thousands of low-income students to drop out of college," he adds. "So instead of achieving President Obama's college degree attainment goals, we will be falling further and further behind."
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