Anxiety and Uncertainty

July 27, 2011

WASHINGTON -- As the Aug. 2 deadline for increasing the federal debt limit approaches with little sign of an agreement between President Obama and Congressional Republicans, the uncertainty is growing at colleges: what happens to financial aid and federal research funds if the government defaults?

So far, no one seems to know.

The Education Department has been silent on what will happen to financial aid payouts if the federal government bumps up against its $14.3 trillion borrowing limit next Tuesday. (Some analysts estimated Tuesday that the money will not run out until a few days later, perhaps as much as a week, due to increased tax receipts, but the Obama administration has described the date as a hard deadline.) Once the limit is reached, the U.S. Treasury will no longer be able to borrow to pay all of its bills and will have to prioritize its payments, including Social Security checks, debt payments and federal financial aid programs such as Pell Grants and student loans.

An Education Department spokesman said the department could not comment on what might happen if a deal is not made before the debt ceiling is reached, and several higher education associations said they had heard nothing about contingency plans.

“We’re left wondering if student aid will be available,” said Justin Draeger, president of the National Association of Student Financial Aid Administrators. The group received assurances from the Education Department that the aid would be disbursed, he said, but the uncertainty surrounding the situation makes it hard to believe. “If the president is unsure if Social Security will be paid, how can there not be a question about student aid?”

The government currently borrows about 40 cents for every dollar it spends, meaning spending will need to be cut 40 percent if it can no longer borrow. Debt interest, Social Security, defense spending and Medicare and Medicaid make up more than 60 percent of the budget, leaving the remaining discretionary domestic spending -- including all of the money that goes to federal financial aid and research -- vulnerable, said Mark Kantrowitz, publisher of Finaid.org.

“It’s a very difficult situation,” Kantrowitz said. “The entire higher education system is effectively at risk from this.”

The timing is especially difficult because the Aug. 2 deadline falls near the start of the fall semester for many colleges and universities. Several financial aid advisers at NASFAA’s recent conference said that their disbursement date, when they are scheduled to receive federal funds, falls on Aug. 3, so even a short-term federal cash flow problem will be disruptive, Draeger said.

For institutions that depend on tuition for much of their operating budget, even a short-term delay could cause a ripple effect. The colleges would be unable to pay their bills once they have spent their cash reserves, and students who depend on loans for living expenses would probably not receive that money, he said.

Many community colleges, where budgets are tight and many students receive federal financial aid, might be most at risk. But so far, many administrators have hoped that a deal would be reached in time, said David Baime, vice president for government relations at the American Association of Community Colleges.

“Part of it is there’s just so much uncertainty,” Baime said. “I think people are hopeful that this problem is going to get solved.”

Major research universities, most of which have endowments that would allow them to ride out the short-term uncertainty, would also face an interruption in federal funding for science and research. Some members of the Association of American Universities have said they are concerned about the possibility, said Barry Toiv, vice president for public affairs at the AAU. “There’s really nothing to tell them at this point,” Toiv said. “The government has been silent on how the agencies would handle this.”

In some ways, a debt ceiling deal would replace only one form of anxiety with another. Student aid programs, including Pell Grants and some federally subsidized loans, have frequently been seen as a likely target for cuts. In two plans put forward by House Speaker John Boehner and Senate Majority Leader Harry Reid, the Pell Grant received dedicated funding but would require more discretionary spending in both cases to keep the maximum grant at $5,550. Both plans would eliminate subsidized loans for graduate students.

"I think the degree of uncertainty is unprecedented," Draeger said. "They always talk about certainty being important for capital markets, for Wall Street and investors. Certainty is no less important for students and parents who are trying to figure out how to pay for college."

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