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Student Loan Ranger: Understand Why Federal Budgets Matter to Students

Keeping track of the federal budget process is difficult in the best of times, and the creation of the fiscal year 2012 budget was even more convoluted than usual. We've attempted to keep you up to date on some of the twists and turns concerning educational debt, including the impact on Pell Grants of the federal budget compromise negotiated in April 2011 and the elimination of the "in-school interest subsidy" on subsidizedStafford loans for graduate and professional students that accompanied the lifting of the debt ceiling in August.

The reason we've been so assiduous in tracking these budget matters? Because budgets matter.

Look at the fiscal year 2012 appropriation for the Pell Grant program. We'll use it as an example because it is the single largest educational program supported by the federal government. And it is vital for undergraduates from low-income families who rely on the grants to help defray the cost of a higher education.

We relied on the New America Foundation's 2012 Education Appropriations Guide to follow this process. If you're interested in more details about how the budget debate played out over the past year and its impact on education, we highly recommend taking a look at it.

On Sept. 30, 2011, Congress passed a Continuing Resolution (CR) that provided temporary funding for fiscal year 2012 at slightly below 2011 levels. This CR was extended (amid much partisan squabbling) through December 16. That day, the House of Representatives passed a year-end omnibus appropriations bill for fiscal year 2012 (the "2012 Omnibus"). The Senate followed suit the next day.

Department of Education funding in the 2012 Omnibus was $68.1 billion ($233 million less than the funding in 2011), and the Pell Grant program will cost $36.1 billion. This is the second straight year of reduced funding, but Congress did manage to maintain the maximum grant level of $5,550.

Funding for the Pell Grant program in fiscal year 2012 comes from three sources. A permanently funded revenue stream created in 2010 provides $5.2 billion.

The 2012 Omnibus is the second source of funding. It allocates $22.8 billion in appropriations and reallocates $612 million in savings to the mandatory funding stream, created by making eligibility for the Pell Grant program more restrictive, back to the Pell Grant program. The eligibility changes include reducing the maximum income under which a student would automatically qualify for a maximum grant from $32,000 to $23,000 and cutting the years a student can receive Pell Grants from nine to six.

The 2012 Omnibus also suspends the government's payment of interest during borrowers' six-month grace period on subsidized Stafford loans issued between July 1, 2012 and July 1, 2014—saving $1.4 billion over fiscal years 2012-2014—and reallocates these funds as spending to the Pell Grant program in fiscal years 2012 through 2014. As a result, borrowers of subsidized loans during that time will begin accruing interest on their subsidized loans immediately upon leaving school.

The third source of Pell funding is the 2011 Budget Control Act, which lifted the debt ceiling in August 2011. It provides $7.5 billion to the Pell Grant program by eliminating the in-school interest benefit on subsidized Stafford loans for graduate students.

The suspension of interest accrual during the grace period and during deferment—including deferment for unemployment or economic hardship—was also removed along with the forgiveness of accrued interest on subsidized Stafford loans for the first three years a borrower is in Income-Based Repayment.

The elimination of these interest subsidies are a good example of the far-reaching effects these budget manipulations can have. As Ed Money Watch points out, disposing of these provisions will impact borrowers at their most vulnerable points during repayment: when they are leaving school, in hardship deferments, and enrolling in Income-Based Repayment.

To sum up, the fiscal year 2012 budget preserves the Pell Grant program and the maximum grant level of $5,550. This is a significant victory. But it comes at a significant cost that includes tightened eligibility requirements for Pell Grant recipients and the loss of important protections designed to help a wide range of students.

So do budgets matter? You bet, and the devil is in the details and the fine print. You can count on us to do our best to keep you informed through this blog, on Twitter, and via Facebook. You can also get the scoop on programs like Income-Based Repayment and Public Service Loan Forgiveness by attending our free student debt relief webinars.