WASHINGTON — Reports of the Pell Grant’s imminent peril have been exaggerated, according to a Congressional Budget Office report  released Wednesday. The federal student aid program, previously thought to face a $5.7 billion shortfall in 2014, now has another year on sound financial footing. While there still is a shortfall in 2015, it is much smaller than expected.
The new report, part of the Congressional Budget Office’s annual preliminary estimates of the cost of various federal programs, could transform the student aid debate in Washington in the upcoming year. Over the past two years, the Pell Grant has been under perpetual budget pressures. In order to maintain the maximum grant, Congress has ended subsidized loans for graduate students; eliminated the grace period for undergraduates’ subsidized loans; and made eligibility changes that have forced thousands of students out of the program.
It’s still unclear how those changes transformed a shortfall into a surplus. But there is a surplus: At the end of fiscal year 2013, the program will have $9.2 billion left over. Congress could fund the program at current annual appropriation levels -- right now, the total program cost is $36 billion, with $23 billion from annual appropriations -- for 2014 and meet the program’s needs, said Jason Delisle, director of the Federal Education Budget Project at the New America Foundation. The shortfall for 2015 is only $1.4 billion — much smaller than the $8.7 billion previously projected. (Note: This paragraph has been updated with additional budget analysis on the shortfall in 2015.)
In September, the Education Department reported  that the Pell Grant program cost $6.5 billion less than expected in the 2011-12 fiscal year, and $2.2 billion less than in 2010-11. That decrease, driven both by eligibility cuts and by a drop in spending on students at for-profit colleges, also came as a surprise to many observers.
"It changes everything," Delisle said. The $1.4 billion shortfall in 2015 is "manageable," he said, and while the Pell Grant still faces long-term fiscal problems, the surprising surplus could significantly alter conversations about the bedrock federal aid program in the next two years.
In recent years, the Pell Grant has increasingly been described as a program run wild , growing out of control and in need of major changes to contain costs in the long term. While some of those changes, as well as the money Congress pumped into the program from changes to student loans, contributed to the Pell Grant's surprising fiscal health, the CBO report casts doubt on whether the grant's problems were as big as they were believed to be when cuts were made.
"There was a sort of false urgency we have all been under," Delisle said. The elimination of the summer Pell Grant, which let students receive two grants in one year, saved $4 billion, and ending Pell for “ability to benefit” students (those without a high school diploma or GED) saved $268 million. The savings from both add up to far less than the total surplus.
The Pell Grant got an infusion of funds in 2010, when the Obama administration used savings from switching from bank-based to direct student lending to expand the program. But part of the grant's mandatory funding runs out when the fiscal year ends in October, and many advocates for the program were concerned about what would happen then . The changes of the past few years hit some students hard, particularly at community colleges. But they were considered most of the easy fixes available to Congress. As budget pressure continued, advocacy groups, think tanks and others were gearing up for a more significant overhaul of the federal grant program.
The upcoming year still features plenty of budgetary crisis points for federal financial aid: mandatory budget cuts that exempt Pell but go into effect March 1; the expiration of the law funding the government on March 27; the deadline to raise the debt ceiling; and the doubling of the interest rate for subsidized student loans on July 1. The student loan “cliff’ in particular could still lead to a rethinking of federal financial aid.
And a long-term plan to keep the program solvent is still necessary, Delisle said. While the program has continually come in short of projections, at some point either costs will level off or begin to climb.
For the moment, though, the crisis has been postponed, buying the program at least another year and perhaps two without an immediate budget crunch. “The crisis is always one year away,” Delisle said. “But somehow we don’t get there.”