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Pell Grants Face a Potential $6 Billion Budget Shortfall

September 18, 2008

by Scholarships.com Staff

According to a Department of Education memo cited by the New York Times, the Federal Pell Grant program could face a budget shortfall of up to $6 billion in 2009 due to increases in grant amounts and numbers of applicants.  The cap on Pell awards has risen from $4050 to $4731 between 2006 and now, and will increase to $6000 for the 2009-2010 academic year (if funding is available) according to the recently reauthorized Higher Education Act.  Meanwhile, the number of FAFSA applications has risen by nearly 17 percent in the last year alone, driven by a worsening economic situation.

While data has not yet been released on whether more students are qualifying for Pell Grants or other need-based federal student financial aid this year, increasing college enrollment and unemployment rates, coupled with an overall economic downturn and increased cost of living for Americans, certainly suggest the possibility exists.  According to the Department of Education memo to Congress, tough choices or an unpopular announcement regarding Pell Grant funding may have to be made shortly after the next President's inauguration.  While it's speculated that Congress will ultimately find the money to fully fund the popular grant program, the federal government is by no means exempt from economic strain.

This announcement comes at the same time as the release of the results of an audit of 14 student loan guaranty agencies, which suggests the government may have lost over $1 billion to FFELP student loan companies taking advantage of a now-closed federal funding loophole.  Lenders had been recycling new student loans through a loan program that guaranteed a 9.5 percent return from the government on student loans made before 1993.  Lenders had been taking advantage of this loophole as late as 2006, claiming in some cases hundreds of millions of federal dollars for which they should have been ineligible.

When these loan recycling programs came to light, the Department of Education settled with lenders, allowing them to keep the money they had gained up to that point in the 9.5 percent program, but requiring them to immediately cease using the program or submit to an audit in order to continue receiving the subsidies on loans actually eligible.  So far, 14 lenders have agreed to these audits.  Based on the results, if the loan agencies audited are representative of all lenders that participated in the 9.5 percent program, federal losses could total $1.2 billion.  Several of the lenders involved in this settlement, including Nelnet, a company that also recently settled with New York Attorney General Andrew Cuomo over other questionable business practices, have also announced that they are unable to completely fund their student loan programs for the 2008-2009 school year.

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