What we know about student loans and the Department of Education
Will the Department of Education’s restructuring impact student loans? Here’s what we know.
Funding for yet another government program is on the verge of drying up, potentially making higher education even more unaffordable for millions of Americans, according to a study by the nonprofit Committee for a Responsible Federal Budget.
The Congressional Budget Office predicted in January that Pell grants, which help pay for college for about 7 million low- and moderate-income students annually, will run out in fiscal year 2025, or the 2025-26 school year. CBO had warned that the hole reached $2.7 billion that year and could grow to nearly $10 billion by the end of fiscal year 2026.
President Donald Trump’s “One Big Beautiful Bill” injected $10.5 billion into the program at once, but that will only slow its depletion rather than solve the problem, nonprofits said.
The cash infusion “helped Mr. Pell avoid an immediate crisis and provided a temporary buffer,” the nonprofit said. “However, this one-time fix will only delay reserve depletion by approximately two years, as program costs are expected to exceed funding by $6 billion to $11 billion each year going forward.”
This is much sooner than Social Security funds run out in 2034 or Medicare runs out in 2033.
Why is there a lack of Pell Grant funding?
Pell grants are funded by both mandatory and discretionary spending. The discretionary portion is set annually by Congress through the budget process.
Because Congress allocates funds months in advance, initial estimates can be too high, creating a surplus, or too low, creating a shortfall, relative to the number of students who actually apply and qualify each year.
Most recently, enrollment has increased more than CBO predicted, and changes to the Free Application for Federal Student Aid have increased the number of students eligible for Pell Grants. In June 2024, CBO expected enrollment to decline for the 2024-25 school year due to the chaotic FAFSA rollout. Instead, enrollment increased and will continue to increase from 2025 to 2026, the National Student Clearinghouse Research Center said.
In addition, Congress expanded Pell eligibility to the Short-Term Workforce Program while giving the program one-time enhancements.
“While proponents argue it will help workers qualify for in-demand jobs, it comes at a financial cost,” the Committee for a Responsible Federal Budget said. CBO estimates that the initiative, called “Workforce Pell,” will increase program costs by approximately $2 billion over the next 10 years.
The committee estimates that the actual cost of Pell staff could be significantly higher, approximately $6 billion or more, depending on recruitment rates, how states and agencies implement new programs, and how the Department of Education interprets and enforces accountability measures.
“History has shown that when new qualifications are created, enrollment often exceeds initial expectations,” the commission said.
The committee estimates that the Pell Grant program faces a shortfall of $61 billion to $97 billion over 10 years.
What does the shortage mean for students?
Experts say students are at risk of losing financial aid if the Pell Grant program runs out of money.
“Pell shortfalls will only be recognized for one year, after which the award will be automatically reduced to zero out the cumulative shortfall,” the committee said. “Without swift action, Pell Grant program benefits will be significantly reduced.”
When Pell Grants faced a shortfall in 2011, Congress cut program costs by more than $50 billion over the next decade, according to the Institute for College Access and Success, a nonprofit focused on making education affordable. As a result, students are no longer able to use Pell funds for summer courses. The lifetime Pell limit was reduced from 9 years or 18 semesters to 6 years or 12 semesters. And millions of students immediately lost their Pell eligibility.
How can the government increase funding for Pell Grants?
In April, the House Education and Labor Committee proposed tightening eligibility for Pell Grants to save money. Some of the proposals include increasing the number of credits needed each year to be considered a full-time student, eliminating students who attend school less than half-time, and reducing bonuses by including overseas earnings when calculating eligibility. If these proposals had passed, the Committee for a Responsible Federal Budget estimates that at least $40 billion would have been saved.
The committee said the government could also consider further student loan reform, lower higher education tax credit costs, and changes to non-education spending and revenue. He also said the Department of Education needs to control costs with strict accountability in the new Workforce Pell program.
Others have suggested moving Pell Grants to mandatory full funding each year and removing the discretionary portion to ensure the program’s coffers are always full.
“The only way to completely eliminate this yearly uncertainty is to change the Pell Program to be fully funded by the mandated side of the budget,” the Institute for University Access and Success said. “This transition eliminates the need for annual expenditures and automatically adjusts program funding based on participant changes.”
Medora Lee is USA TODAY’s money, markets and personal finance reporter. Please contact us at mjlee@usatoday.com. Subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.
