Federal Pell Grant Program of the Higher Education Act: Primer
Released: 2018-11-28T00:00:00

Introduction

The Federal Pell Grant program, authorized by Title IV-A-1 of the Higher Education Act of 1965, (HEA; P.L. 89-329), as amended, is the single largest source of federal grant aid supporting undergraduate students. The program provided approximately $29 billion in aid to approximately 7.2 million undergraduate students in FY2017. Pell Grants are need-based aid that is intended to be the foundation for all federal need-based student aid awarded to undergraduates. In award year 2015-2016, Pell Grants represented 72% of all federal undergraduate grant aid; 53% of federal, state, and institutional undergraduate need-based grant aid; and 28% of total grant aid for undergraduates coming from federal, state, institutional, and private sources.

The discretionary statutory authority for the Pell Grant program was authorized through FY2017. The discretionary authorization was extended through FY2018 under the General Education Provisions Act (GEPA), although the program has continued to receive appropriations. HEA also provides permanent mandatory program appropriations.

This report provides descriptions of key elements of the Pell Grant program and information on recipient demographics, award levels, award value, program costs, and program funding. The first section of the report addresses how the program works and describes the basic process for awarding Pell Grants including the application process, student eligibility requirements, award rules and calculations, and the role of the institution of higher education (IHE) in the process. This section is followed by sections on recipient characteristics and the role the program plays in relation to other student aid. The report explains the complex Pell Grant funding streams and their implications. Finally, program costs and estimates are presented. In addition, the appendices provide historical Pell Grant award amounts (Appendix A), Pell Grant recipient counts (Appendix B), recent and future program funding (Appendix C), surplus and shortfall levels (Appendix D), and acronyms commonly used in the report (Appendix E).

Student Eligibility and Program Award Rules

This section of the report provides an overview of the structure of the Pell Grant program and the process through which grants are made to students. It describes student eligibility, underlying concepts and award rules for determining students' grants, and the role played by postsecondary institutions in the program.

Briefly, the Pell Grant program provides grants (i.e., aid that does not have to be repaid) to financially needy undergraduates. To apply for a Pell Grant or any HEA Title IV student aid, students must complete and submit the Free Application for Federal Student Aid (FAFSA), providing requested financial and other information. When the FAFSA is processed, the individual's expected family contribution (EFC) is calculated. The EFC is the amount expected to be contributed by the student and the student's family toward postsecondary education expenses for the upcoming academic year. After processing, each applicant receives a Student Aid Record (SAR). Each institution of higher education (IHE) designated by the applicant on the FAFSA receives an Institutional Student Information Record (ISIR). The SAR and ISIR contain the information submitted on the FAFSA and the individual's EFC.

Institutions that receive valid SARs or valid ISIRs for eligible Pell Grant applicants are required to disburse Pell Grant funds to students who successfully enroll in approved coursework. Pell Grants are portable aid , that is, the grant aid follows students to the eligible postsecondary education institutions in which they enroll. In addition, the Pell Grant program is often referred to as a quasi-entitlement because for the most part eligible students receive the Pell Grant award level calculated for them without regard to available appropriations (for more on program funding, see the " Program Funding " section). The size of each student's grant is based, principally, on EFC, the total maximum Pell Grant for the award year, and the student's enrollment rate, but may not exceed the student's cost of attendance.

Student Eligibility

To be eligible for a Pell Grant, a student must meet requirements that apply to HEA Title IV student aid programs in general as well as requirements specific to the Pell Grant program.

Among the requirements generally applicable to the HEA Title IV student aid programs for award year (AY) 2018-2019 are the following:

Students must be accepted for enrollment or enrolled in an eligible program at an eligible institution for the purpose of earning a certificate or degree. Students must not be enrolled in an elementary or secondary school and must have a high school diploma (or equivalent). Students must meet citizenship requirements. Males must have registered with the selective service system when 18-25 years of age. Students must maintain satisfactory academic progress while enrolled. Satisfactory academic progress requires a minimum grade point average (or its equivalent) and passing a minimum percentage of attempted credits or hours. Students must not be in default on a Title IV student loan, or have failed to repay or make an arrangement to repay an overpayment on a Title IV grant or loan, or be subject to a judgment lien for a debt owed to the United States. Students must have repaid any Title IV funds obtained fraudulently. Students may be disqualified for an unusual enrollment history —receiving HEA Title IV aid at multiple schools in the same semester, or receiving aid and withdrawing before earning any credit. Students may be disqualified for a period of time for a federal or state conviction for possession or sale of drugs while receiving HEA Title IV student aid.

Specific eligibility requirements for the Pell Grant program include the following:

Students must not have already completed the curriculum requirements of a bachelor's or higher degree. Students must be enrolled in non-foreign institutions. Students must be financially needy students as determined under the program's award rules (see below). Students must not be incarcerated in a federal or state penal institution. Students must not be subject to an involuntary civil commitment following incarceration for a sexual offense (as determined under the FBI's Uniform Crime Reporting Program). Students with a significant intellectual disability must be accepted for enrollment or enrolled in a comprehensive transition and postsecondary program.

Underlying Concepts and Award Rules

The amount of an eligible student's Pell Grant award is determined on the basis of a set of award rules. In general, these award rules are designed to ensure that the neediest students (as determined by their EFC) receive the highest Pell Grant awards in each award year. As need decreases or EFC increases, Pell Grant awards decrease until they phase out completely. Students who demonstrate a level of need that falls between these two extremes are awarded Pell Grant aid on a sliding scale. Additionally, Pell Grant awards are prorated for students who attend on a less-than-full-time, full-year basis. An important feature of the Pell Grant award rules is that the grant is determined without consideration of any other financial assistance a student may be eligible to receive or may be receiving. This reflects the intention to make the Pell Grant the foundation of federal need-based aid in a financial aid package. The Pell Grant award level is calculated without regard to other aid that may be awarded. Other HEA federal aid is added to the aid package after the Pell Grant is awarded.

Some of the underlying concepts associated with the Pell Grant program, as well as the program's award rules, are discussed below. In general, provisions are discussed as in effect for AY2018-2019.

Award Year

The HEA Title IV award year begins the first day of July in a given year and ends the last day of June the following year. For example, award year (AY) 2018-2019 begins July 1, 2018, and ends June 30, 2019.

Academic Year

The HEA Title IV academic year is an IHE-determined instructional unit. For credit hour programs, the academic year requires a minimum of 30 weeks of instructional time. For a clock hour program, the academic year requires a minimum of 26 weeks of instructional time. A full-time, full-academic-year student is expected to complete at least 24 semester hours, 36 quarter credit hours, or 900 clock hours. Each IHE establishes an academic year for each educational program. There may be more than one academic year within an award year.

Payment Period

The payment period is an academic period or period of enrollment for which Pell Grant aid is disbursed. Each academic year must have at least two payment periods. For example, an IHE on a standard semester calendar may disburse Pell Grant funds two times, once for each of two semesters: fall and spring.

Discretionary Base Maximum Award

The discretionary base maximum award is the amount specified in annual appropriations laws. For AY2018-2019, the discretionary base maximum award is $5,035. The annual appropriations laws also establish the amount of discretionary funding available to fund the discretionary base maximum award for the program for the corresponding award year. Table 1 presents the discretionary base maximum award for the last five years, and Table A-1 provides a history of discretionary base maximum award amounts since AY1973-1974.

Mandatory Add-On Award

The mandatory add-on award is an amount established by the HEA. For AY2018-2019, the mandatory add-on award is $1,060. The HEA provides permanent and indefinite mandatory appropriations to fund the mandatory add-on award. From AY2013-2014 through AY2017-2018, statutory provisions established a formula to annually modify the mandatory add-on amount to account for inflation. For AY2017-2018 and all subsequent award years, the mandatory add-on amount remains the same in accordance with statutory provisions. Table 1 presents the mandatory add-on award for the most recent five years, and Table A-1 provides a history of mandatory add-on award amounts when provided since AY1973-1974.

Total Maximum Award

The total maximum award amount is the maximum Pell Grant amount that a student may receive in an academic year. The total maximum award is the sum of the discretionary base maximum award and the mandatory add-on award. For AY2018-2019, the total maximum award is $6,095. Table 1 presents the total maximum award for the last five years, and Table A-1 provides a history of total maximum award amounts since AY1973-1974.

Expected Family Contribution (EFC)

The EFC is a number calculated in accordance with an HEA-defined methodology that is used to establish how much the student's family is expected to contribute to the student's educational costs. The EFC is used in conjunction with COA to determine whether a student is eligible for Title IV need-based aid (aid based on the student's and the student's family's financial need). Generally, a student with an EFC greater than the maximum Pell Grant will not be eligible for a Pell Grant and a student with an EFC higher than their COA will not qualify for any federal need-based aid. The EFC calculation methodology differs for dependent students, independent students with no dependents other than a spouse, and independent students with one or more dependents other than a spouse. Generally speaking, an independent student is an individual who is 24 years old or meets another criterion specified in the HEA. A student under the age of 24 cannot qualify as independent on the basis of being financially independent of his or her parents or not being claimed on the parents' tax return. The lowest EFC is $0, and there is no maximum EFC. The EFC is determined utilizing family and financial (income and asset) information submitted by the aid applicant on the FAFSA.

Automatic (Auto) Zero EFC

Students who apply for federal student aid and meet certain qualifications automatically receive a zero EFC ($0). The qualifications are based on either the family's reporting income being below a specified threshold or meeting other criteria.

Dependent students and independent students with dependents other than a spouse can qualify for an automatic zero EFC based on an AGI below a specified level and meeting other criteria. To qualify for an auto zero, the parents of the dependent student or the independent student (and spouse, as appropriate) must have an adjusted gross income (AGI) below a specific threshold and meet one of three additional criteria. The AGI threshold is $25,000 for AY2018-2019. The additional criteria are receipt of means-tested benefits from other federal programs, eligibility to file or having filed certain federal income tax returns, and having been a dislocated worker. Independent students without dependents other than a spouse are not eligible for an automatic zero based on their financial situation.

An otherwise Pell Grant-eligible student whose parent or guardian was a member of the U.S. Armed Forces and died as a result of performing military service in Iraq or Afghanistan after September 11, 2001, receives an automatic zero EFC provided the student was under 24 years old or was enrolled at an IHE at the time of the parent or guardian's death.

In cases where a student does not qualify for an automatic zero, the student may still qualify for a calculated zero EFC on the basis of the full EFC formula and information provided on the FAFSA.

Cost of Attendance (COA)

For Pell Grant award purposes, the cost of attendance (COA) is an IHE-determined measure of educational expenses for a student enrolled full-time for a full academic year. In general, it is the sum of (1) tuition and fees; (2) an allowance for books, supplies, transportation, and miscellaneous personal expenses; (3) an allowance for room and board; and (4) for a student with dependents, an allowance for costs expected to be incurred for dependent care. Institutions may use average costs for students at their school, rather than calculating actual expenses for each student. Average COA amounts must be based on the same category of students. For example, institutions may establish separate averages by residency: in-state or out-of-state, or housing: on-campus or off-campus.

Scheduled Award Rule

The scheduled award is the maximum Pell Grant aid a full-time, full-academic-year student can receive. In accordance with the HEA, the scheduled award is the least of (1) the total maximum Pell Grant minus the student's EFC, or (2) Cost of Attendance (COA) minus EFC. Most students are awarded Pell Grant aid based on the first condition of this rule (i.e., Pell Grant Award = Total Maximum Pell Grant – EFC), since the total maximum Pell Grant award available to a student in an award year is typically less than the student's COA at the attending institution. For example, a student with a zero EFC would be eligible for a scheduled Pell Grant award that is equivalent to the total maximum award, as long as the amount did not exceed the student's COA.

Annual Award Rule

The annual award is the maximum Pell Grant aid a full-academic-year student can receive at the student's enrollment rate. The HEA requires ED to annually publish a schedule of annual award amounts that are proportionally reduced scheduled awards for students who are not enrolled full-time for the full academic year. In practice, ED publishes four disbursement schedules: full-time; less than full-time, but at least ¾ -time; less than ¾-time, but at least ½-time; and less than ½-time. Each schedule provides a table of annual award amounts by COA increments and EFC increments. The annual award for a student enrolled at least ½-time in a clock-hour or non-term credit-hour program is taken from the full-time disbursement schedule.

Minimum Award

The minimum Pell Grant award is the smallest annual award amount for which a student must qualify to receive a Pell Grant award. In other words, a student must qualify for at least this minimum amount to be eligible for the program. The minimum award is 10% of the total maximum award. For AY2018-2019, the minimum Pell Grant award is $610, or 10% of $6,095.

Alternatively, the minimum Pell Grant award may be conceptualized as a maximum EFC. To qualify for a Pell Grant award, a student's EFC must be no more than 90% of the total maximum award. In AY2018-2019, a student with an EFC above $5,486, or 90% of $6,095 rounded to the nearest whole number, would not be eligible for a Pell Grant.

Pell Grant Award Disbursements

Pell Grant aid awards are disbursed in each payment period for which a student is eligible. Pell Grants must be paid out in installments over the academic year. In general, the annual award amount is proportionally divided among each payment period in the academic year. Each academic year must have at least two payment periods. For example at an IHE on a traditional semester calendar in AY2018-2019, a full-time, full-academic-year student with a zero EFC could receive $3,047.50 in the fall semester and $3,047.50 in the spring semester. See Figure 1 for an example of Pell Grant award disbursements.

Year-Round (Summer) Pell Grants

Since award year 2017-2018, qualified students may receive up to 1½ scheduled Pell Grants, or up to 150% of the scheduled award, in each award year. To qualify for the additional funds, a Pell Grant-eligible student must be enrolled at least ½-time in a payment period after receiving most or all of the student's scheduled award in previous payment periods of the award year. For example at an IHE on a traditional semester calendar in award year 2018-2019, a full-time, full-academic-year student with a zero EFC could receive $3,047.50 in the fall semester, $3,047.50 in the spring semester, and $3,047.50 in the summer semester. Figure 2 provides an additional example.

Maximum Pell Grant Lifetime Eligibility

The HEA establishes a maximum cumulative lifetime eligibility cap on Pell Grant aid. Over her lifetime, a student may receive the value of no more than 12 full-time semesters (or the equivalent) of Pell Grant awards or six scheduled awards. Pell Grant lifetime eligibility used (LEU) at a closed school from which the student did not graduate does not count toward the lifetime cap—the eligibility used is restored.

Institutional Role

To be eligible for the HEA Title IV programs, including the Pell Grant program, an IHE must meet several statutory and regulatory eligibility criteria. For a description of institutional eligibility requirements, see CRS Report R43159, Institutional Eligibility for Participation in Title IV Student Financial Aid Programs . The IHE may be a public or private nonprofit IHE, a private for-profit (sometimes referred to as proprietary) postsecondary institution, or a postsecondary vocational institution.

An eligible institution's role in administering the Pell Grant program primarily involves reviewing and verifying information submitted by students on the FAFSA, calculating awards, disbursing awards, adjusting awards to ensure students do not receive more assistance than they are eligible for, record keeping, and reporting to ED.

An eligible institution calculates a student's Pell Grant disbursement using the award rules. Generally, institutions credit a student's account with the Pell Grant disbursement payment to meet unpaid tuition, fees, room, and board; any remaining Pell Grant funds are paid directly to the student to cover other living expenses.

ED makes funds available to schools so that they can disburse Pell Grant awards. In addition, the Pell Grant program pays participating institutions an administrative cost allowance of $5 per enrolled recipient.

Description of Pell Grant Recipients and Participation

This section provides descriptive statistics of Pell Grant recipients (numbers and characteristics) and the institutions that they attend. The data may inform discussion regarding the extent to which the program achieves the policy goal of improving access to higher education for financially needy individuals.

Number of Recipients

The Pell Grant program reaches a significant portion of undergraduates each year. In AY2015-2016, the latest year for which data are available, 39% of all undergraduates were estimated to have received Pell Grants. Table 2 shows the number of Pell Grant recipients over the most recent five years, from AY2011-2012 to AY2015-2016, as well as the annual change and annual percentage change during this time. The number of Pell Grant recipients has declined from almost 9.5 million in AY2011-2012 to over 7.5 million in AY2015-2016. Table B-1 displays Pell Grant recipients since AY1973-1974. It is important to note that myriad factors, including the labor market, can affect the number of Pell Grant recipients in any given award year.

Income of Recipients

Since Pell Grant awards are heavily dependent on EFC levels and the complex EFC formula can yield different EFCs for students with similar incomes, there is no absolute income threshold that determines who is eligible or ineligible for a Pell Grant award. Nevertheless, Pell Grant recipients are primarily low-income. In AY2016-2017, an estimated 95% of Pell Grant recipients had a total family income at or below $60,000. Independent Pell Grant recipients' income is generally lower than their dependent counterparts. As a point of reference, median household income for all U.S. households with or without students was $57,230 in 2015 and $59,039 in 2016.

It is important to note, however, that a small percentage of Pell Grant awards go to mid- and high- income families. For the most part, these awards are smaller than the average Pell Grant award for all students and are typically provided to dependent students from families who have multiple students enrolled in postsecondary education at the same time.

Distribution of Pell Grant Recipients and Funds by Institutional Type

The types of institutions in which Pell Grant recipients enroll may not reflect the overall enrollment patterns of undergraduate students who do not receive Pell Grants. For example, a larger proportion of Pell Grant recipients attend private for-profit institutions than do students not receiving Pell Grants. Table 3 shows the AY2015-2016 enrollment distribution by institutional sector of undergraduates who do not receive a Pell Grant and undergraduates who do receive Pell Grants. Each group is disaggregated for dependent and independent students. For both independent and dependent students, the share of Pell Grant recipients attending private-for profit institutions was more than double the share of undergraduate students who do not receive Pell Grants attending such institutions. One possible explanation for this disparity is that for-profit institutions may target marketing to low-income students. Most undergraduates, whether receiving Pell Grants or not, attend public four-year or public two-year institutions. For example, over half of independent Pell Grant recipients attend either public four-year (22.0%) or public two-year (32.5%) institutions.

Role of the Pell Grant

The Pell Grant is intended to function as the foundation of federal need-based aid for financially needy undergraduates. As described earlier, other financial aid received by a student is not taken into account in determining a student's Pell Grant. This section explores the role Pell Grants and other sources of aid play in helping students meet postsecondary costs.

Purchasing Power

The total maximum Pell Grant, available to students with a zero EFC who enroll on a full-time, full-year basis, is often used as a gauge of the Pell Grant program's level of support in each year. Figure 3 compares the total maximum grant to average undergraduate tuition, fees, room, and board charges (base educational costs) at public two-year, public four-year, private two-year, and private four-year institutions between AY1973-1974 and AY2016-2017. It is evident that the maximum was at its peak relative to these average charges during the 1970s. Since the 1990s, the extent to which the total maximum Pell Grant covers average base educational costs has been variable; however, despite some increases, the total maximum Pell Grant has lost ground relative to average base educational costs at public four-year institutions. In AY2016-2017, the total maximum grant ($5,815) covered approximately 58% of the average base educational costs at public two-year institutions, 30% at public four-year institutions, 23% at private two-year institutions, and 14% at private four-year institutions.

It is also important to note that in all sectors of higher education, published tuition, fees, and room and board have consistently risen more rapidly than average prices in the economy for a number of years. An analysis of the purchasing power of the Pell Grant maximum award, therefore, could also include an examination of why published prices at institutions of higher education have risen at such a rapid rate and what is the role of federal student aid, including Pell Grants, in contributing to rising published prices.

Receipt of Pell Grants and Other Aid

The Pell Grant is intended to be the foundation of federal need-based student aid from Title IV of the HEA. In AY2015-2016, an estimated 16% of Pell Grant recipients relied on a Pell Grant as their only source of aid from all sources, and 34% of Pell Grant recipients did not receive other HEA Title IV aid funds.

Most Pell Grant recipients (84%) participate in other student aid programs. For those Pell Grant recipients with a zero EFC, Table 4 shows estimates of the average percentage of cost of attendance (COA) covered by their Pell Grant award, their loans from all sources, and their total aid package in AY2015-2016, by total family income. This table allows for examination of the extent to which Pell Grants and other aid helped Pell Grant recipients with a zero EFC meet their COA. Table 4 shows, for example, that among all Pell Grant recipients, Pell Grant aid covered, on average, 27.1% of the COA and all loan sources covered, on average, an additional 20.3% of the COA for these recipients. For Pell Grant recipients, total aid from all sources supplies less than two-thirds (62.9%) of the COA, on average.

Program Funding

This section of the report reviews the latest Pell Grant program funding trends and reviews Pell Grant funding sources and procedures. As a quasi entitlement that makes grant payments to eligible students who apply for aid and enroll in eligible programs notwithstanding the appropriation level available in any one year, the program may operate with a surplus or shortfall of discretionary funding. Funding provided for the Pell Grant program is exempt from sequestration, pursuant to provisions included in Section 255(h) of the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA, Title II of P.L. 99-177 , as amended). Given the somewhat unique funding characteristics of this program, this section of the report explores funding concepts, funding levels, and insight into how shortfalls and surpluses of discretionary funding in the program have been addressed.

The Pell Grant program since approximately FY2008 has been funded through three funding streams. A discretionary appropriation is the primary source of funds for the discretionary award amounts. There are two mandatory funding streams. The smaller mandatory funding stream augments the discretionary appropriations to fund the discretionary award level. Therefore, a portion of the discretionary award level is funded through mandatory appropriations. A larger mandatory appropriation funds the mandatory add-on award amounts. Recent and historical discretionary maximum award levels and mandatory add-on award levels are shown in Table 1 and Appendix A , respectively. Appendix C presents the three distinct funding streams and enacting legislation since FY2008.

Role of Discretionary Funding

Annual discretionary appropriation bills provide the largest portion of funding for the Pell Grant program, and this funding typically remains available for use for two fiscal years. An annual appropriation is usually available for obligation on October 1 of the fiscal year for which the appropriation is made and remains available for obligation through September 30 of the following fiscal year. Thus, while FY2018 funds are provided with the purpose of supporting awards made from July 1, 2018, to June 30, 2019, these funds are available for obligation from October 1, 2017, to September 30, 2019, and may support multiple award years. This multiyear availability allows the discretionary appropriation to operate at a surplus or shortfall in any given year. As mentioned earlier, annual discretionary appropriation bills also establish the base discretionary maximum grant for each applicable award year.

Role of Mandatory Funding

Specified Mandatory Appropriations to Augment Discretionary Funding

The SAFRA Act (enacted as part of the Health Care and Education Reconciliation Act of 2010; P.L. 111-152 ), the FY2011 Continuing Appropriations Act ( P.L. 112-10 ), the Budget Control Act of FY2011 ( P.L. 112-25 ), and most recently the FY2012 Consolidated Appropriations Act ( P.L. 112-74 ) amended the HEA to provide specified mandatory appropriations for the Pell Grant program to augment current and future discretionary appropriations. That is, these funds, while mandatory from a budgetary perspective, can be used to pay for costs in the program for which annual discretionary appropriations are typically provided. The concept of providing advance mandatory funding to augment or supplant discretionary funding in the program is relatively new. Prior to FY2007, mandatory funding had been infrequently provided for the Pell Grant program, but usually to supplement discretionary funding to pay for accumulated funding shortfalls.

Permanent, Indefinite Mandatory Appropriations for the Add-On Award

The SAFRA Act also established permanent, indefinite mandatory appropriations for the program to provide for the mandatory add-on award amount in FY2010 and beyond. Although the mandatory appropriations that fund add-on award amounts are available permanently for such sums as necessary , the amount provided for each year will be determined based on actual costs associated with the applicable add-on amount.

Summary of Recent and Projected Funding

Table 5 provides a summary of recent and projected Pell Grant program funding from FY2012 through FY2021. A distinction is made between discretionary appropriations, mandatory appropriations provided to augment discretionary appropriations, and mandatory appropriations provided to fund add-on award amounts. Table 5 also displays the mandatory appropriations that have been provided through FY2021.

From a budgetary perspective, these recent mandatory appropriations have been offset largely by enacted provisions that were estimated to have resulted in savings from the federal student loan programs, which are classified as mandatory programs. Additionally, some of the mandatory appropriations provided for the program in the FY2011 Continuing Appropriations Act and FY2012 Consolidated Appropriations Act were offset by enacted provisions that resulted in mandatory savings in other aspects of the Pell Grant program.

Mandatory appropriations that will be necessary to fully fund the add-on award amount are available permanently, but the specific amount required in each year cannot be reported until the add-on amount is determined and all funds are disbursed to eligible students. ED does, however, estimate the amount of mandatory appropriations provided required to fund add-on award amounts for the current and subsequent fiscal years.

Discretionary Funding Shortfalls and Surpluses

The Pell Grant program is often referred to as a quasi-entitlement and has for the most part been operated as an appropriated entitlement. An appropriated entitlement is a program that receives mandatory funding in the annual appropriations acts, but the level of spending is not controlled through the annual appropriations process. Instead, the level of mandatory spending for appropriated entitlements, like other entitlements, is based on the benefit and eligibility criteria established in law, and the amount provided in appropriations acts is based on meeting this projected level. The Pell Grant program is not an entitlement because the program is primarily funded through discretionary appropriations. In addition in the past, statutory benefit and eligibility criteria were adjusted so that spending would not exceed appropriations. Finally, annual Pell Grant discretionary appropriations are determined on the basis of estimates of program costs and other policy considerations.

To the extent that the annual appropriation may be higher or lower than actual program costs, the program may operate at a surplus or shortfall. The surplus or shortfall may accumulate over more than one year. The HEA requires that the Secretary of Education, when she has determined that the appropriated funds are insufficient to satisfy all Pell Grant entitlements, notify each chamber of Congress of the funding shortfall, identifying how much more funding is needed to meet those entitlements. The Secretary can respond to a shortfall in Pell Grant funding by allocating funds from the most recently enacted appropriation to pay for obligations incurred in previous award years. For example, although the FY2019 appropriation is expected to fund award year 2019-2020 program costs, the appropriation may fund award year 2018-2019 costs since obligations for these costs occur in FY2019. This permits ED to use funds from multiple fiscal years' appropriations to meet one award year's cost.

The misalignment between estimated program costs (appropriations) and actual expenditures is often related to economic and statutory changes. When the general economy weakens, postsecondary enrollment often increases and thus Pell Grant participation and cost increases.

Table 6 provides a 10-year history of funding of estimated shortfall or surplus levels, funding for the discretionary award amounts, and estimated expenditures (Appendix D provides data from FY1973 to FY2018). Although discretionary award amounts are funded by discretionary and mandatory appropriations, the surplus or shortfall is accounted for using only discretionary funding. The annual funding shortfall or surplus differs from the cumulative shortfall or surplus, which may accumulate over multiple award years. It is also important to note that Congress may have provided a reduced appropriation level in a given year when a funding surplus was available for use from the previous year. Conversely, Congress may have provided additional appropriations in a given year to pay for an estimated funding shortfall from the previous year.

Table 6 shows a high cumulative shortfall of $9.569 billion at the end of FY2010 and high cumulative surplus of $11.082 billion at the end of FY2013. The FY2010 cumulative shortfall was transformed into a surplus by a complicated mix of increased funding levels that exceeded $30 billion annually and declining expenditures. The FY2013 cumulative surplus of $11.082 billion has decreased to an estimated $7.410 billion surplus at the end of FY2018. Since FY2014, the annual funding has hovered near $23 billion despite generally higher expenditures. The two subsequent sections of the report describe the policy implications of shortfalls and surpluses and the measures to address them.

Policy Implications and Measures to Address Funding Shortfalls

For the most part, funding shortfalls in the Pell Grant program have been recognized as common occurrences. Persistent or high funding shortfalls, as in FY2010, may be viewed as fiscally irresponsible. In essence when there is a shortfall, the program is in debt, and eventually the debt must be paid. The higher the debt level, the more difficult it is to resolve.

Generally speaking, with input from the Administration and other stakeholders, Congress adopts legislation that controls spending across the federal government and for specific programs. Through the budget resolution process, a 302(b) allocation is established for each of the 12 appropriations bills. These allocations, referred to as 302(b) subdivisions, establish the maximum discretionary amount that can be spent through each bill. Therefore generally but with exceptions, individual program-level discretionary appropriations within the annual Departments of Labor, Health and Human Services, and Education, and Related Agencies appropriations bill must be balanced within its established 302(b) allocation. In other words, increased discretionary appropriations for one program may coincide with decreased discretionary appropriations for one or more other programs. Resolving a Pell Grant program shortfall may lead to a difficult decision about which program(s) to reduce discretionary funding.

Over the years, federal policymakers and Congress have taken a variety of measures to address the vexing issues associated with funding shortfalls in the Pell Grant program. The measures have included modified budget scoring, reductions in students' awards, recipient caps, reductions in program costs, and supplemental appropriations.

Reductions in Students' Awards and Recipient Caps Before 1992

From the inception of the program in 1972 until the enactment of the Higher Education Amendments of 1992 ( P.L. 102-325 ), the Secretary of Education had statutory authority under the HEA to reduce awards to respond to a shortfall in appropriated funds. Reductions were made in awards in eight years using this authority (the last in AY1990-AY1991). After this HEA authority was repealed, appropriations legislation for FY1994-FY2001 continued to provide the Secretary with reduction authority, but that authority was not used. FY2002 and subsequent appropriations legislation have not included such language.

CBO Scoring Rule

Congress took steps in FY2006 to limit the possibility of large accumulated funding shortfalls in the future. H.Con.Res. 95 (109 th Congress) established a permanent rule that applies to the scoring of the Pell Grant program by the Congressional Budget Office (CBO). The rule provides that if the appropriation of new discretionary budget authority enacted for the program is insufficient to cover the full estimated costs in the upcoming year—including any funding surplus or shortfall from prior years—the budget authority counted against the bill for the program will be equal to the adjusted full cost (i.e., total need). The full estimated costs must be based on the maximum discretionary award amount and any changes to the eligibility criteria. For most discretionary programs, CBO equates the budget authority to the level provided in each appropriation bill.

As a result of the scoring rule, Congress cannot fund new programs or increase the funding of existing programs subject to discretionary appropriations while providing less funding than required for the Pell Grant program. The scoring rule, however, cannot fully account for the challenges of estimating the cost of the program. Discretionary program costs are estimated in advance of the award year they are intended to support, and based on the chosen discretionary base maximum award level and estimated program participation. The scoring rule does constrain the accumulation of the funding shortfall by requiring Congress to annually reconcile previous years' appropriation levels with updated estimates of previous years' program obligations.

Reductions in Program Costs

Given the CBO scoring rule, there are several levers that have been used to reduce or prevent an increase in Pell Grant program costs and thus reduce or eliminate a shortfall.

The discretionary maximum award level has been reduced or not increased. Statutory provisions that establish Pell Grant award rules have been modified to reduce the amount of funds that some students may receive. For example, year-round Pell Grants were eliminated beginning in AY2011-2012. Statutory provisions that establish Pell Grant eligibility have been modified to reduce the number of recipients. For example, the qualifying minimum award amount was increased beginning in AY2012-2013. Statutory provisions that establish the calculation of EFC have been modified to reduce the numbers of students eligible for Pell Grants and other HEA Title IV need-based financial aid. For example, the income threshold for an automatic zero EFC was increased beginning in AY2012-2013 in order to reduce the number of students receiving an automatic zero EFC. Statutory provision that establish student eligibility for any HEA Title IV aid programs have been amended to reduce eligibility. For example, the ability of new students without a high school diploma (or equivalent) to qualify for HEA Title IV aid was temporarily eliminated from July 1, 2012, through June 30, 2014.

Supplementary Appropriations

In addition to reducing program costs or in lieu of reducing program costs to reduce or eliminate a funding shortfall, legislation has provided supplementary appropriations to address the CBO scoring rule.

Supplementary mandatory appropriations have been provided for general use in the program, often by generating savings in the Direct Loan program that is funded by mandatory budget authority. Supplementary discretionary appropriations have been provided during periods of expansionary fiscal policy such as through the American Recovery and Reinvestment Act (ARRA; P.L. 111-5 ).

In addition to supplementary appropriations, the regular discretionary appropriations amount may be increased.

Policy Implications and Measures to Address Funding Surpluses

The policy implications of a funding surplus are very different from those of a shortfall. An increasing or high cumulative surplus may be viewed as presenting a potential opportunity. The surplus may be viewed as representing a pot of available funding. The surplus may be invested back into the Pell Grant program or it may be used to pursue other policy priorities.

There are several approaches for investing the surplus into the program.

Appropriations levels and statutory provisions may be maintained under the assumption that Pell Grant program costs would eventually use the surplus. For example as the U.S. population grows, postsecondary enrollment and Pell Grant participation may grow. Award levels for Pell Grant recipients may be increased in order to increase the size of a Pell Grant. For example, the discretionary base maximum award was increased from $4,860 in FY2009-FY2017 to $5,035 in FY2018. Student eligibility for Pell Grants may be expanded. For example, increasing the discretionary base maximum award from $4,860 in FY2009-FY2017 to $5,035 in FY2018 also increases the number of students who are eligible. Statutory provisions that establish Pell Grant award rules may be modified to increase the amount of funds that some students may receive. For example, year-round Pell Grants were reauthorized beginning in AY2017-2018. Statutory provisions that establish the calculation of EFC may be modified to increase the numbers of students eligible for Pell Grants and other HEA Title IV need-based financial aid. Statutory provision that establish student eligibility for any HEA Title IV aid programs may be amended to increase eligibility.

Alternatively, the surplus may be used to fund or increase funding for other programs or to reduce a budget deficit. All or a portion of the surplus may be rescinded in an appropriations act. For example, the Consolidated Appropriations Act, 2017 ( P.L. 115-31 ) included a rescission of $1.3 billion from the Pell Grant program surplus. The rescission offsets the cost of appropriations in the act.

Estimated Program Costs for Recent and Future Years

Grant payments are made to eligible students who apply for aid and enroll in eligible programs notwithstanding the prescribed appropriation levels in any one year in such a way that some liken the program to a quasi entitlement . Costs for the Pell Grant program are award year-specific and are primarily affected by the number of eligible students who apply for aid and enroll in eligible programs, the total maximum award amount, and award rules. The number of eligible students may be affected by economic conditions and legislative changes to the federal need analysis methodology and award rules. As discussed earlier, the total maximum award amount is determined by both the annual appropriations act and the HEA. Other factors that contribute to changes in program costs include the cost of higher education.

The Congressional Budget Office reports and estimates program costs at least annually. Table 7 provides a summary of current and future estimated Pell Grant program costs from AY2012-2013 through AY2021-2022, as of April 2018. Costs associated with the discretionary base maximum award and costs associated with the mandatory add-on award are specified. Table 7 shows that the total program cost has declined from AY2012-2013 to AY2016-2017 and is estimated to increase thereafter.

From AY2012-2013 to AY2015-2016, the number of Pell Grant recipients decreased annually ( Table 2 ) although the total maximum award amount increased annually since AY2013-2014 ( Table A-1 ). Declining undergraduate enrollment in degree-granting postsecondary institutions from 28.2 million in AY2011-2012 to 26.3 million in AY2015-2016 is reflected in a reduction of Pell Grant recipients. The decrease in the number of Pell Grant recipients from AY2012-2013 to AY2015-2016, which is particularly evident in the decrease in costs related to the discretionary award level, outweighs the increase in the total maximum award, which is demonstrated in increased costs associated with mandatory award levels.

Program costs after AY2016-2017 are estimated to increase ( Table 7 ). The increase would primarily be a result of an estimated increase in the number of Pell Grant recipients and the awarding of year-round Pell Grants. The CBO baseline does not account for any potential a change in the total maximum Pell Grant award after the AY2018-2019 discretionary maximum award increase included in the Consolidated Appropriations Act, 2018 ( P.L. 115-141 ).

Appendix A. Historical Pell Grant Award Amounts

Appendix B. Federal Pell Grant Recipients, AY1973-1974 to AY2015-2016

Appendix C. Program Funding: FY2008-FY2021

Appendix D. Annual and Cumulative Discretionary Funding Shortfalls and Surpluses in the Pell Grant Program, FY1973-FY2018

Appendix E. Glossary/Acronyms