Debt-ceiling bill includes $17B increase in Pell Grants

Lawmakers gave Pell Grants for low-income college students a $17 billion boost at no additional cost to taxpayers by eliminating the in-school interest subsidy on subsidized loans for graduate students.

After weeks of political posturing, the agreement reached by lawmakers to raise the nation’s debt ceiling contains some good news for low-income undergraduate students—and bad news for other education stakeholders.

With just hours left before the national debt bumps against its cap, emergency bipartisan legislation to allow the government to borrow more money faces one final test in the Senate. Expected passage there sends the bill to President Barack Obama, averting a potentially disastrous, first-ever government default and making a down payment toward taming budget deficits.

The legislation, which easily passed the House on Aug. 1, is virtually assured to clear the Senate shortly after noon Aug. 2 by a bipartisan tally. The White House promises Obama will sign the measure into law.

The legislation pairs an increase in the government’s borrowing cap with promises of more than $2 trillion in budget cuts over the coming decade, including cuts to federal education spending. However, Pell Grants for low-income college students will receive $17 billion more in funding at no additional cost to taxpayers by eliminating the in-school interest subsidy on subsidized loans for graduate students.

That means graduate students would have to pay interest on their loans while still in school. The deal also eliminates the current student loan interest rate reduction for on-time loan payments. Together, these two changes are expected to generate $22 billion in savings, with $17 billion allocated for Pell Grants and the remaining $5 billion helping to reduce the deficit.

“This $17 billion in dedicated mandatory funding for Pell Grants helps close the program’s funding gap, protecting Pell Grants from harmful cuts without impairing other critical discretionary programs,” said Pauline Abernathy, vice president of The Institute for College Access & Success, in a statement. “More than nine million students depend on Pell Grants to attend and complete college. Even with a Pell Grant, recipients are more than twice as likely as other students to have to take out student loans, and they graduate with significantly more debt than other students.”

She added: “A broad coalition of 62 education, student, civil rights, and public policy organizations urged the president to preserve the maximum Pell Grant award of $5,550 and protect the program from harmful cuts in the debt negotiations. Even after the recent increases in the maximum Pell Grant [amount], it will cover less than a third of the cost of attending a four-year public college next year—the smallest share in the history of the program. Full funding for Pell Grants is absolutely essential to fulfilling the president’s goal of the U.S. once again having the highest proportion of college graduates in the world by 2020.”

The debt-ceiling measure would provide an immediate $400 billion increase in the $14.3 trillion U.S. borrowing cap, with $500 billion more assured this fall. That $900 billion increase would be matched by cuts to agency budgets over the next 10 years, including cuts to federal education funding.

What follows next is more complicated. The measure establishes a special 12-member bipartisan committee to draft legislation to find up to $1.5 trillion more in deficit reductions for a vote later this year. These additional cuts are likely to come from so-called mandatory programs such as federal retirement benefits, farm subsidies, Medicare, and Medicaid. The savings would be matched by a further increase in the borrowing cap.

There’s no guarantee the committee, to be evenly split between the warring parties, will agree on such legislation. But there are powerful incentives to do so, because more budget gridlock would trigger a crippling round of automatic cuts across much of the budget, including Pentagon coffers.

The details of the final bill were still sketchy as of press time. But a source on Capitol Hill said it was possible that, if the committee fails to reach agreement on the second wave of reductions and across-the-board cuts kick in, K-12 nondiscretionary education funding could be cut by as much as $3 billion each year from 2013 to 2021. It was unclear how higher-education funding would be affected.

The bill’s passage caps a long, difficult battle between Tea Party-powered House Republicans and President Obama—with House Speaker John Boehner caught in the middle more than once.

After months of fiercely partisan struggle, the House’s top Republican and Democratic leaders swung behind the bill, ratifying a deal sealed July 31 with a late-night phone call from Boehner to Obama.

“I’m not happy with it,” House Minority Leader Nancy Pelosi, D-Calif., said. “But I’m proud of some of the accomplishments in it. That’s why I’m voting for it.”

Much of the measure was negotiated on terms set by Boehner, which included a demand that any increase in the nation’s borrowing cap be matched by spending cuts at least as large.

While it also meets some demands made by Obama, including debt increases large enough to keep the government funded into 2013 and curbs on growth of the Pentagon budget, it fails to include a key sticking point for Democrats: tax increases on wealthy individuals and large corporations to help offset cuts.

Even though Obama strongly supported the measure, half of the House Democrats opposed it. Sixty-six conservative Republicans opposed the measure as well. Still, after storming the Capital in January, many junior House lawmakers opted to view the legislation through the prism of optimism.

“It’s about time that Congress come together and figure out a way to live within our means,” said Rep. Sean Duffy, R-Wis. “This bill is going to start that process, although it doesn’t go far enough.”

Rep. Jan Schakowsky, D-Ill., said the Republicans got the better of the deal.

“Republicans intentionally created a crisis in order to get their way,” Schakowsky said. “This is the wrong medicine for a sick economy. This bill could increase unemployment, slow economic growth, and deepen already historic income inequality.”

In the Senate, support from Majority Leader Harry Reid, D-Nev., and GOP leader Mitch McConnell of Kentucky virtually guarantees the measure will receive the 60 votes required to pass on Aug. 2. The vote is set for noon, plenty of time to ship the measure up Pennsylvania Avenue to Obama. The administration has said that without the new borrowing authority, the government won’t be able to pay all its bills after Aug. 2.

Enactment of the measure would provide welcome closure for Obama, who has seen his poll numbers sag during the debt limit battle.

GOP presidential candidates such as Mitt Romney and Michele Bachmann issued statements opposing the legislation.

“As with any compromise, the outcome is far from satisfying,” Obama conceded in a video his re-election campaign sent to millions of Democrats.

In a tweet, the president was more positive: “The debt agreement makes a significant down payment to reduce the deficit—finding savings in both defense and domestic spending.”

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