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The Pell Grant Program Has an $8 Billion Surplus. Here's Why You Still Have So Much College Debt.

President Trump wants to raid the grant program to send Americans back to the moon.

by Alex Lubben
Jun 7 2019, 2:44pm

When President Donald Trump proposed a return trip to the moon after nearly 46 years, he proposed an odd source of money to pay for it: an $8 billion pile of cash that's just sitting in government coffers as part of the Pell Grant program, which provides grants to low-income students to pay college tuition.

It may seem strange that the Pell Grant program would have such a surplus while total student debt in the U.S. has more than doubled in the last 10 years. Total student debt now tops $1.5 trillion, up from $675 billion when the recession ended in 2009.

But the Pell program wasn’t designed to alleviate a student debt crisis when it launched in 1965. The maximum Pell grant is a measly $6,195 per year to pay for college — and most Pell recipients get less than that. And its funding is susceptible to political vicissitudes because Congress funds it differently from other programs like it.

Most entitlement programs in the U.S. — think Social Security and Medicare, for example — are funded by mandatory formulas. In other words, Congress doesn’t decide how much money is going to go toward most these programs every time they draw up a new budget. The funding is guaranteed.

Not so with Pell. More than 80 percent of the program is funded with discretionary dollars, so Congress does have to decide each year on how much cash to put toward Pell. Sometimes Congress gives the program money and then fewer students apply for Pell grants that year, so Pell winds up with a surplus. Some years there’s a flood of Pell applicants and the program runs out of money. Either way, the balance carries over.

The Pell program enjoys bipartisan support, but when it runs a surplus, it becomes a target for the White House and lawmakers looking to fund programs without increasing the deficit.

“We’ve got this surplus money here, it’s always attractive,” said Jessica Thompson, the director of policy and planning at the Institute for College Access & Success. “But the Trump administration has taken a different tack. For three years running, they’ve suggested taking very large chunks of that money out.”

If Trump’s budget were to be put into practice, “the surplus would be gone and Pell would be more than $1 billion in the hole by the following year, 2021,” said Richard Kogan, a senior fellow at the Center on Budget and Policy Priorities.

So far, Congress, which ultimately holds the government’s pursestrings, hasn’t taken the Trump administration’s recommendation to spend the Pell surplus. But even Congress occasionally dips into that fund: Last year’s budget deal included a $600 million cut from the Pell surplus and a boost in funding for the National Institutes of Health.

Why is the Pell Grant program such an attractive target? Let’s start with the basics.

What’s a Pell Grant?

The Pell Grant program was started back in the 1970s to help students pay for college by giving them grants — not loans that need to be repaid — in order to subsidize their higher education. It’s an entitlement program, which means that if a student applies and meets the income threshold for a Pell Grant, they’ll get it automatically. It’s entirely need-based: No essays or grades taken into account.

Why does the program have so much extra money lying around?

In short, because Congress has to decide how much money to give the program every year. Funding for Pell isn’t guaranteed, like funding is for other entitlement programs like Social Security.

“Each year, Congress has to guess how many recipients there will be of Pell Grants next year,” said Ben Miller, vice president for postsecondary education at the Center for American Progress. “If they think it’s going to be more people than actually show up, it’s going to be a surplus, and if they underestimate, it’s going to run a deficit.”

Because funding fluctuates, Congress sometimes leaves the program with a rainy day fund on hand to make sure that, should Pell enrollment spike, it can be paid for.

Does it always run such a big surplus?

Nope.

Back in 2011, the program was running a $9 billion deficit. That’s because the worse the economy is, the more people decide to forgo the crappy job market and go to college. That’s exactly what happened when the Great Recession hit. Enrollment in the Pell Grant program went through the roof. In 2007, about 5.5 million students were getting Pell grants; by 2009, there were over 8 million Pell grant recipients, and by 2012 there were about 9.5 million.

But it’s dropped back down. Over the course of the last ten years’ worth of sustained economic growth, college enrollment is down. So is the number of Pell recipients. In 2017, the number of Pell enrollees was just over 7 million.

“When the program was at its peak enrollment, they made a bunch of changes that saved money, and that’s reduced the amount of shortfall they had to deal with going forward,” Miller said. “After they did that, enrollment in the Pell Grant program started to fall.”

When Pell has run a deficit, that’s historically been when Congress has made cuts to it. During the recession, Congress cut back on certain aspects of the program, like funding for summer semesters. The summer semester funding has been reinstated, however. The cuts plus the drop in enrollment have contributed to the big surplus the program currently has.

Why can’t we use the Pell cash to reduce existing student debt?

The average student loan debt in 1996 was nearly $13,000 (in today’s dollars). By 2017, it was $28,650. Sen. Elizabeth Warren is arguing on the campaign trail that forgiving student debt would constitute “an enormous middle-class stimulus that would boost economic growth.”

The Pell program, as it’s currently structured, is hardly making a dent. “We look at Pell and see that its purchasing power is the lowest it’s been in the history of the program,” Thompson said. “It’s at 28 percent in terms of the share of a public four-year college cost. It used to be over 70 [percent].”

“All of those past increases in the Pell award didn’t keep up with the growing cost of college,” Kogan said. “And that’s the big problem.”

But Pell can’t just up its game: The upper limit of Pell Grant funding is set by Congress during budget negotiations. The Department of Education administers the program, but can’t just up funding because they have extra money on hand.

Why are Pell Grant recipients still graduating with tons of debt?

Pell grants usually don't cover the full cost of tuition. And when room, board, books and other expenses are factored in, the low-income Pell recipients often find themselves needing to borrow even more money to get through school.

They ultimately graduate at a lower rate than their non–Pell-receiving counterparts. A 2017 study from the Brookings Institute found that 51 percent of Pell recipients graduate within six years of starting school, compared to 59 percent for students who didn’t get Pell grants.

“A lot of people think that low-income students who receive Pell Grants or state-based grant aid are, quote-unquote, ‘taken care of,’” Thompson said. “But what we see when we look at the data, Pell recipients are more likely to have to borrow, and they’re more likely to borrow more than other students who aren’t receiving Pell.”

Cover: Barnard College students as they participate in Columbia University's commencement, Wednesday, May 22, 2019 in New York. More than 14,000 undergraduate and graduate students at the university have completed their studies. (AP Photo/Mark Lennihan)

CORRECTION (June 7, 2019, 11:24 a.m.): An earlier version of this piece misstated in the headline the total size of the Pell program’s surplus. It is over $8 billion. The earlier version also misstated when grants for incarcerated people were cut back. It was in 1994.

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