Public Policy Update: Coming in 2013

A Year of Cliff Dwelling for Higher Education

By Terry Hartle    //    Volume 21,  Number 1   //    January/February 2013

Shortly before adjourning in January 2013, the 112th Congress passed legislation, the American Taxpayer Relief Act, designed to prevent the nation from falling off the “fiscal cliff.” Taxes were raised on the wealthiest Americans, and a number of other important issues were addressed: reimbursement for physicians who accept Medicare were preserved and long-term unemployment benefits were extended. A number of specific tax provisions that will affect higher education were also addressed. For example, the American Opportunity Tax Credit and the tax deductibility of payments on student loans were both extended.

Equally interesting is what the American Taxpayer Relief Act did not do. It did not extend the federal debt ceiling. It postponed for two months—but did not repeal—the automatic reductions in federal spending known as sequestration. And it did not approve the spending bills needed to fund the federal government through the end of the current fiscal year (FY 2013 ends on September 30). All of these are controversial and politically charged and all will have to be addressed, most likely in late February or early March. So, while we certainly avoided one fiscal cliff, we created three more.

Colleges and universities face three additional challenges—let’s call them public policy cliffs—in the coming months. By public policy cliffs, I mean specific policy issues that will be and must be settled. How they are addressed (or if they are not addressed) could have a dramatic impact on our institutions and our students.

Cliff Number 1: Changes in College and University Admissions. Sometime in late spring or early summer, the Supreme Court will issue its decision in Fisher v. University of Texas, a case that challenges the use of affirmative action in college and university admissions.

The potential outcomes range from a total ban on the consideration of race in admissions to a decision that upholds current practices. Any sharp restriction on affirmative action would have a profound impact on college admissions and force significant changes in the practices at many institutions, especially at selective colleges and universities that have more qualified applicants than they can admit and that seek to admit a diverse student body. Even a further clarification or narrowing of the court’s ruling in its previous cases will force all campuses to carefully review their admissions practices and make modifications.

Cliff Number 2: The Student Loan Interest Rate. In 2007, Congress passed legislation that gradually reduced the student loan interest rate from 6.8 percent in the 2007–08 academic year to 3.4 percent in 2011–12. But when it approved the reduction, Congress agreed that, as of July 1, 2012, the rate would return to 6.8 percent. As that date approached, Congress and the president—both anxious to avoid an interest-rate increase in an election year—approved a one-year extension. The witching hour now falls on July 1, 2013.

This really is a cliff—those who take out a loan on June 30, 2013 will get the lower rate, but those who borrow a day later will pay twice as much. The change will affect roughly 9 million students who are expected to borrow in the 2012–13 academic year. While borrowers will not actually feel the impact until they begin to repay their loans, the higher rates will mean a significant difference in monthly repayments. Under the higher rate, a student who borrows $3,644 (the average size of a subsidized Stafford Loan) for a year of college will repay an additional $740 over a 10-year repayment schedule (the most commonly used repayment plan). A student who borrows $23,000 is looking at an additional $4,650 over the same 10-year period.

Congress may, of course, elect to extend the lower rate again, although there are no signs yet that this will happen soon. Doing so would impose an annual cost on the Treasury of roughly $7 billion, a huge sum of money under any circumstance and even more so in the context of deep cuts to federal spending. In all likelihood, this issue will once again be decided just before the new rates take effect.

Cliff Number 3: Pell Grants. Historically, the Pell Grant Program has been funded from the “domestic discretionary” part of the federal budget. This meant that the amount of the award students received was subject to the annual funding decisions made by Congress. Starting in academic year 2008, however, Congress began to supplement the annual discretionary appropriations by adding funds from the “entitlement” or “mandatory” side of the budget.

The most notable example of this occurred when Congress eliminated the federal bank-based student loan program in 2010, saving a great deal of money in subsidies that otherwise would have been paid to lenders and using most of it to increase funding for Pell Grants. Unfortunately, even this huge influx of funds (almost $40 billion) was not sufficient to meet the rapidly increasing cost of the Pell program. This funding problem was temporarily averted when, as part of the August 2011 deal between Congress and the White House to increase the federal debt ceiling, the president insisted on putting more mandatory money into the Pell Grant Program to sustain it for two more years (academic years 2012 and 2013).

At present, roughly $7 billion per year of the $35 billion spent on Pell Grants comes from this mandatory funding. Here’s the cliff: These funds will be exhausted before the start of the 2014 academic year, and the amount of money available for Pell Grants will be sharply reduced, although by how much will not be clear until we get closer to the actual date. Regardless of the precise number, it will be big. Congress will face a very difficult decision: find the extra money to maintain the Pell Grant Program (at the same time that sequestration may sharply reduce federal spending) or agree to sharp reductions in the Pell Grant Program (which could be done by reducing the size of the award or by making some current recipients ineligible).

Which brings us back to the fiscal cliff that so dominated public discussion as we began the new year. One of the many challenges created by this cliff is that it was impossible for political leaders to plan. After most presidential elections, policy makers fairly quickly begin to lay out the challenges to be addressed in the coming year. But the fiscal cliff obliterated such discussions. The breadth and depth of the changes in the federal tax and spending policy are so big that it became impossible to talk about anything else until this set of issues was resolved. But as noted above, Congress did not address all of the issues raised by the fiscal cliff and actually pushed the final decisions further into the new year.

This will make it much harder for Congress to turn to other urgent issues. While President Obama has made it clear that he hopes to tackle immigration reform and gun control in the coming year, the failure to resolve all the federal issues will, to invoke a cliché, suck all of the oxygen out of the room. Public policy is likely to be at a standstill for at least the next few months.

Given the array of really big issues that Congress and the president will confront this spring—Raise the debt limit! Cut Social Security! Increase taxes! Slash Medicare! Reduce defense spending!—it’s not surprising that funding for student aid and scientific research is not getting much attention. So the uncertainty predominating in Washington is palpable. One way or the other, it looks as if ambiguity and confusion are likely to surround everything the federal government does in the days and months ahead. Stay tuned.

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