Though many Americans may have already tuned out the excessive talk in the media concerning the upcoming “fiscal cliff” situation government faces next year, a large number of the population may be feeling its effects come next year.
In particular, current and perspective college students who rely on federal student loans and grants may be feeling a squeeze in aid money as early as January, depending how a deeply divided congress chooses to respond to the impending budget crisis. This so-called “fiscal cliff” that financial experts and political pundits refer to is the combination of the expiring tax-cuts enacted under former President George W. Bush and of a number of critical federal spending cuts that are due to be enacted under the Budget Control Act of 2011.
Among the items on the chopping block are federal student aid programs, such as Stafford loans, Pell grants and federal work-study.
“I realized this would be an issue as soon as they passed the Budget Control Act of 2011, which set us up for this,” said Mark Kantrowitz, an expert in the field of student financial aid.
Perhaps the most common form of federal student aid, the Stafford Loan program, may see some dramatic changes over the next year.
Named after former US Senator Robert Stafford, the government has handed out these loans to college students since 1965. The relatively low-level interest rates these loans have over ones provided by private lenders has been one of the primary reasons for their popularity. However, the gap between two may soon grow ever narrower.
One of the provisions of the Budget Control Act eliminates funding for subsidized Stafford loans. Unlike their unsubsidized counterparts, these advances are issued to students on based on their financial needs, and their interest is paid for directly by the government while the person they are issued to remains in school, with only a 3.4 percent rate.
“Every Stafford loan will be unsubsidized for here on out,” Kantrowitz said. “People can borrow the same amount, but the interest rate will be unsubsidized, at 6.8 percent.”
The elimination of these loans isn’t all that surprising, as Congress already eliminated subsidized loans for graduate students last year.
“In a way, it simplifies things, as you no longer have these different loan programs,” Kantrowitz said. “The subsidized Stafford loans, it makes the loans cheaper, but it doesn’t affect any possible goals for improving access to post-secondary education or improving graduation rates because it doesn’t kick in until after you graduate.”
Because this, lawmakers have placed little priority in maintaining the program, as it doesn’t directly further any their public policy goals, Kantrowitz added. With their elimination, the government is expected to save around $6 billion in spending, Kantrowitz said.
While the elimination of subsidized Stafford loans will make repayment more expensive, the money that government saves from their demise will help keep another prominent federal aid program afloat.
The US Pell Grant program, which has existed along side Stafford Loans for nearly 50 years, will be able to use the funds from a defunct subsidized loan program to line its coffers for another year. These grants, named after former Senator Claiborne Pell, are awarded to students based on need, given with no strings attached.
Unlike other federal aid programs, the Pell program is in no immediate danger of being cut, as Congress has already allocated funding to the program through next year. However, the aforementioned $6 billion saved from subsidized loans would nearly cover the $8 billion shortfall the grants are expected to see in 2014, Kantrowitz said.
In order to cover the remaining $2 billion, Kantrowitz predicts that Congress will have to further tweak how they distribute grant money to eligible students.
“Next year, in fiscal year 2014, it’s likely that everybody’s grants would go down as opposed to cutting the number of grants given,” Kantrowitz said. “With that program, [Congress] doesn’t have the flexibility to choose to whether to cut the number of grants or the amount of the grants.”
However, lawmakers could get around this restriction by further tightening the requirements for eligible students. Earlier in the year, legislators voted to reduce the number of semesters grant money can be awarded, from 18 to 12.
Unlike with Pell grants, Congress enjoys greater flexibility in how it chooses to administer other federal aid initiatives, such as federal work-study and Perkins loans. These programs could all see cuts as high as 8 percent should members of both houses fail to come to compromise before the end of the year.
“The way this is likely to manifest itself is, for example, in the federal work-study program, [Congress] is unlikely to cut the amount that work-study students receive, but rather cut the amount of work-study jobs,” Kantrowitz said. “They’re likely to cut the amount of awards, not the amount per award.”
Another major consequence of failed negations could be the elimination of the American Opportunity Tax Credit, a federal tax credit intended to help parents and students pay for college expenses. This credit was originally scheduled to expire back in 2010, but was extended by Congress until the end of this year, along with other Bush-era tax cuts.
“There is significant potential, that if congress doesn’t come to an agreement, we would see a significant reduction in aid eligibility,” Kantrowitz said.
Even in the scenario that Congress fails to either reduce the amount of spending cutbacks or extend the tax cuts, the increased revenue from the latter would help offset the severity the former would have on student aid.
“However, the ideal would be for Congress to come up with cuts that don’t involve cutting student aid, and extend the American Opportunity Tax Credit and make it permanent,” Kantrowitz said.
The amount of uncertainty surrounding the future of federal aid is causing some anxiety among WMU administrators, particularly those in the office of financial aid.
“This upcoming year, I have never seen anymore issues that are completely uncertain,” said Mark Delorey, the head of the university’s financial aid office. “We’re used to making guesses about tuition, state appropriations and federal funding, but this year I almost feel like throwing my hand up in the air and saying ‘I don’t have a clue.’”
Since the University sends out financial aid award notices as early as March, the next few months will be crucial for Delorey and his staff as they determine how to divvy up aid for incoming and current students. With only the amount of Pell Grant money know for certain, the office can only make the best estimates possible if the federal budget isn’t determined within the next few months.
“We’re trying to very carefully, in a very calculated manner, to read the Washington tea leaves, the Lansing tea leaves and the institutional tea leaves to determine where we’re going to be by the time next fall begins,” Delorey said. “I’ve never seen this much uncertainty.”
In the event that the university promises more aid money than federal aid can cover, the school will have to cover the difference out of its own pocket. However, Delorey said this scenario is highly unlikely.
“These decisions are made very carefully,” he said. “We’re pretty darn good at making these calls and being right.”
The director pointed toward the uncertainty concerning the Michigan Promise scholarship back in 2009 as an example of this cautious decision making. WMU chose not to include the scholarship in its award calculations that year, saving the university millions when the state legislature chose to eliminate the program, Delorey said.
This year, though, Delorey said he hopes that the US government decides on which course it chooses to make with its student aid sooner rather than later, to the benefit of both students and parents.
“My only hope at this point is, aside from a positive outcome in the final results, is that they don’t decide to delay the final decision and put it off, and in doing so, failing to understand that timing is of the essence here,” Delorey said. “We need answers soon, so people can begin making informed decisions about what to expect for next year when those costs arrive.”
<em>Ted Yoakum is the political reporter for the Western Herald. He can reached via <a href=”mailto:firstname.lastname@example.org”>email</a>, <a href=”http://www.twitter.com/therealgyokes”>Twitter</a>, or by phone at 269-588-1040.</em>