Monday, May 04, 2009


The Pell Grant Profit Center

Washington Post writer Shailagh Murray reports that the President is trying to further expand Federal spending and control (I know, I know – dog bites man):

“At stake is a plan to expand the Pell Grant program, making it an entitlement akin to Medicare and Social Security.”

This is a story of some importance and a little reporting by Ms. Murray – beyond just accepting the Administration’s spin - would be nice.

“Shifting all lending authority to the government through its Direct Loan program would save $94 billion over 10 years, according to the Congressional Budget Office [CBO]. Obama would use that windfall to expand the Pell Grant program, created in 1965 to cover most tuition costs for low-income students.”

Well, yes, the CBO did estimate that a modification to the Family Federal Education Loan Program would inure to the benefit of the government of about $94 billion. But their very next line (from Table 1-5 – page 12) estimates that modifying Pell Grants will cost an additional $293 billion. They explain:

The current Pell grant program has discretionary and mandatory components. CBO’s estimate of the costs of modifying Pell grants includes the costs of setting the maximum award at $5,550 in 2010, indexing that award level for future years, and reclassifying the entire program as mandatory spending. That reclassification would result in eliminating spending for Pell grants in CBO’s discretionary baseline, which currently includes $195 billion in outlays for new grants over the 2010–2019 period. “ CBO Preliminary Analysis of President’s Budget March 2009

The bottom line then is a net increase in costs of $4 billion ($293b increase in mandatory less $195b decrease in discretionary = $98b increase as compared to the above-noted $94b decrease).

You may believe that a worthwhile activity/expenditure of your federal government. But any program change that entails a switch from discretionary to mandatory spending as well as identified extra costs surely deserves a bit more reporting - and skepticism -from the Washington Post.

Side Note: Nor is the “windfall” $94 billion a result of government efficiency beating out the private sector. Instead this results from moving the profits on student loans from the private sector directly to the government. I believe that nationalizing any enterprise doesn’t bode well for the profitability of that business activity so I’ll conclude that that “windfall” falls off the more time the federal government is responsible for generating it.

Given past criticism of loan program cost estimates by the CBO, OMB, CRS, GAO, etc., it's unlikely eliminating FFELP would produce anywhere close to that amount of savings. In other words, Pell Grants will be grossly underfunded.

As important, the projected $94 billion is not what lenders would have made. Lender profits are very very low. The $94 billion is what the government's profits would be from borrowing money from investors at 0 or 1 percent (on Treasury securities) and turning around and lending it at 6.8 percent.

Borrowing has gotten very cheap for the government. The government has decided to compete with a private sector activity only because it now has a cost of funds advantage.

When doesn't the government have such an advantage?
15 years ago my wife went back to school for a second bachelor's degree. She got a Pell Grant.

Pell Grant's make education loans easily affordable.

But here's the problem, by effectively directing more money to the education sector, Pell Grants have an inflationary effect. So while the terms of the Pell Grant loans are better, they've undoubtedly made college even less affordable.

Maybe this is an area the government ought not to be involved in.
Anonymous - excellent point on the low cost of funds advantage the government currently enjoys.

SD - you're right, the rapid increase in college costs can be seen as inflationary in that the government is just pouring money into it: too much money chasing too few goods.
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