The Wall Street Journal
By: Melissa Korn & Mary Pilon
December 21, 2010
The already complicated process of paying for college may have gotten even trickier.
A surge in students - and financial need - has left the Federal Pell grant program facing a potential $5.7 billion gap in funding for the academic year beginning in fall 2011. Lawmakers may again be nearing a compromise to shore up the gap in funding of Pell grants for low-income students, less than a week after their first attempt was killed, but the continued uncertainty has created anger and frustration among financial aid offices, as financial officers at colleges around the country worry any decision might not come in time to meet their typical late-winder deadlines for offering aid packages to students.
Also watching the process: private student loan companies, who could see a bump in business if students face a new funding gap. The firms have taken a beating in recent years because of changes in federal loan programs, a shift in student preference toward cheaper schools and tight credit markets.
The Pell program provided over $32 billion in aid and anticipated 8.3 million new awards in 2010, according to Department of Education figures. As part of student loan legislation passed in March, the amount of money that students can receive from a Pell grant maxes out at $5,550 for the 2010-2011 school year and was scheduled to hold steady for 2011-2012. However, if the $5.7 billion gap isn't addressed, the maximum grant per student could drop to $4,705 from $5,550, slashing the award by as much as $845. The Pell grant could be eliminated completely for thousands of students who may qualify for lesser amounts.
The House and Senate on Tuesday are expected to take up legislation to fully fund the grants, Washington insiders say. However, a deal could fall through again as the Senate also rushes through votes on a nuclear arms treaty and other last-minute legislation before the Christmas holiday.
Day by day, the uncertainty is pushing harder against financial aid office deadlines.
"We're very concerned about it," Justin Draeger, president of the National Association of Student Financial Aid Administrators, says. "Some schools start putting together their aid packages as early as January. We need a signal from Congress so we can model this out."
Last week, lawmakers hoped to wrap Pell funding into the $1.1 trillion omnibus bill. That failed to pass, though, and college financial aid officers are now concerned they will need to craft aid offers without knowing where that aid will come from. Pell grant funding, unlike entitlements like Social Security, needs its funding approved every year by Congress.
The University of North Carolina at Chapel Hill, for example, is in the process of budgeting financial aid for the 2011-2012 academic year "right now," said Shirley Ort, associate provost and director of scholarships and student aid. The school is planning with the assumption that Pell grants will be fully funded. "We don't want to think that way yet," Ms. Ort said of the alternative.
UNC-Chapel Hill's student body has grown more reliant on Pell grants increase recently, with 18% of undergraduates getting the funding in the 2009-2010 academic year, compared with 14% in the prior year. Ms. Ort said the dollar amount of awards has increased as well.
"That program is the foundation of our service to low- and lower-middle-income students," Ms. Ort said. "It's really the lynch pin to our [aid] packages. It's just hugely important."
The Pell uncertainty could also cause major complications for students, not just the schools they attend. To fill the gap in grant dollars, low-income students could turn to higher interest private student loans, increasing their debt burden when they leave school, administrators say.
One million moderate-income students could lose the Pell Grant and about 6 million low and moderate income students would have smaller grants, estimates Mark Kantrowitz, publisher of FinAid.org. He says that there could be at least a 10% increase in private student loan volume, and probably closer to a 25% increase, if the program isn't funded at its prior levels.
But many of those students may not even qualify for private loans, as lenders have tightened credit standards in recent years after being burned by high delinquency and default rates. A number of large loan companies now require students to have a co-signer, and borrowers' FICO scores often need to top 700. Mr. Kantrowitz said students who can't get alternative funding could seek cheaper education alternatives, such as public schools or community colleges, or leave the system entirely.
Meanwhile, a delay or failure in funding the grants could be a potential boon for private student lenders, much needed after a few years of muted loan origination activity. New private loan volume fell to $7.7 billion in the 2009-2010 year from $21.8 billion in 2007-08, according to the College Board, as the federal government increased student aid and the lenders tightened credit standards.
SLM Corp., commonly known as Sallie Mae, expects loan volume of about $2.3 billion this year, compared with $7.92 billion in calendar 2007. That company holds nearly one-third of the nation's private student loan market.
Vice Chairman and Chief Executive Albert Lord said at an investor conference late last month that a cut in Pell grant funding "could be a positive for us," as "obviously that gap has to be made up some way."
Still, when asked about the impact of any change in Pell funding status, the company only reiterated its 2011 forecast for $2.5 billion in private loan originations.
"In very short order, maybe a year or so, we're going to be seeing $20-plus billion in terms of originations" industry-wide, said Friedman Billings Ramsay analyst Matt Snowling. He says Sallie Mae's forecast is conservative.
Wells Fargo & Co., another large student lender, expects "a relatively small increase in actual private loan originations for traditional lenders like us," said Kirk Bare, the company's senior vice president and head of education financial services, adding that Pell grant recipients are often "a slightly different" population than most likely borrowers.
Still, he added, "We would certainly accept any applications from those student borrowers who needed additional education loan funding."