The Fiscal Cliff and Student Aid: What Are the Next Steps?

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January 3, 2013 · by mlivolsi · Spark Notes

Prepared by: Wes Huffman (

After weeks and months of public barbs and private negotiations, the US Congress reached a deal at the last minute (or at 2:00 a.m. and 11:00 p.m. on January 1, just past the last minute) to avert the so-called “fiscal cliff.”  H.R. 8, the legislative vehicle for the end-of-year “must pass” legislation, made it through the Senate by a margin of 89-8 and the House by a margin of 257-167.   In the House, 185 Democrats and 72 Republicans supported the measure.  With most Republicans voting no, this was a rare case where most of the members of the House majority party voted against a measure brought up by their leadership.

Though the fiscal cliff was (and is) a two-part problem—both revenues and spending—the final plan addresses mainly the revenue issue through changes to the tax code that  prevented income tax increases for almost all federal taxpayers.  It does not address large spending issues such as entitlement reform or modifying the looming sequester.  Instead, the plan delays the spending sequester, which calls for across the board discretionary spending cuts in defense and non-defense programs, for two months.  In addition, final appropriations bills for Fiscal Year 2013, which began Oct. 1, 2012, have not been passed.  A “continuing resolution” keeping the government operating at FY2012 levels expires on March 27; without passage of spending legislation by then, much of the government will have to shut its doors.  Also absent from H.R. 8 is an agreement on raising the debt ceiling, the legal limit on the government’s ability to borrow.  The Treasury is already using special administrative maneuvers to keep paying creditors, which it estimates it can continue for about two more months.  This sets up yet another nasty debate over spending, deficits, and debts over the next two months.

Higher Education Tax Credits & the Fiscal Cliff

The final deal made permanent some of the tax credits aimed at higher education.  This is significant because for many years the credits have been extended only a year or two at a time, making long-term planning difficult.  The following provisions were extended permanently:

  • Expanded Coverdell Education Savings Accounts
  • Expanded exclusion for employer-provided educational assistance
  • Expanded student loan interest deduction
  • The exclusion from income of amounts received under certain scholarship programs
  • Tax-exempt private activity bonds for qualified education facilities

The following provisions were temporarily extended:

  • The American Opportunity Tax Credit (5 year extension)
  • The above-the-line deduction for qualified tuition related expenses. (2 years: 2012 and 2013)
  • The deduction for certain expenses of elementary and secondary school teachers. (2 years: 2012 and 2013)
  • The tax credit for research and experimentation expenses. (2 years: 2012 and 2013)

The Fiscal Cliff and Student Aid

Beyond the tax provisions listed above, the fiscal cliff’s biggest impact on higher education relates to federal spending, which, beyond a delay for the sequester and a bit of tinkering around the edges, was not the focus of this first debate.  Now, with the sequester, the debt ceiling, and the expiration of a continuing resolution (legislation to keep the government funded) all on the horizon, all of the talk in Washington in January and February will be about spending, the deficit, and the debt.

The across the board cut of the sequester was slightly modified via H.R. 8, but the real debate will take place over the next two months.  Absent any action from Congress, federal discretionary programs, including the student aid programs, will receive a cut of

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roughly 8 percent.  The campus-based programs (FWS and SEOG), Trio, GEAR-UP, and others would see an immediate cut, while the Stafford and PLUS loan programs would be required to institute an increase in fees under the current sequester.

Pell Grants were initially protected in terms of FY2013 funding.  However, due to the interaction of the federal fiscal year and the academic year, Pell Grants for next year (2013-2014) may face a cut under the current sequestration scenario.  In terms of Perkins Loans, sequestration will have minimal impact as it is very difficult to cut a program which has been a zero line in the budget for the past few years, but sequestration and the related efforts to reduce discretionary spending make it more difficult to secure additional Perkins funding.

Moving Beyond the Cliff & Sequestration

The final deal ensures much of 2013 will be an ongoing debate on deficits and the debt.  The deal’s lack of a debt ceiling agreement means brinksmanship is a tactic likely employed by both sides.  It is also important to remember that sequestration largely defines the budgetary framework for the next several years, but details will be filled in by the appropriators and the authorizers.

Against this backdrop, the interest rate on subsidized Stafford Loans is scheduled to double on July 1, rising from 3.4 to 6.8 percent, and maintaining the current rate costs roughly $6 billion per year.  In addition, Pell Grants (absent any issue with sequestration) face an estimated shortfall of $5-6 billion for FY2014.  It is difficult to see a sustainable path for both programs without a major expansion of the Department of Education budget or serious reforms.  The question for 2013 is whether or not the Congress will attempt to address these issues in the long-term or continue with a “patch and go” funding system that has been in place for the past few years.

FY 2013:  Key Dates to Remember

The following is a list of key dates for federal appropriations and the student aid programs:

  • March 1, 2013: Sequestration set to take effect (after two month delay put in place by H.R. 8)
  • March 27, 2013:  Current continuing resolution funding the federal government expires
  • July 1, 2013:  Subsidized Stafford Loan interest rates set to double
  • September 30, 2013:  End of federal fiscal year 2013

Fiscal Cliff:  Additional Resources
For our members interested in the ins and outs of this debate, we suggest three (free) stories from a couple of Washington, DC publications.  Be forewarned, these are very detailed accounts of this debate.

For those interested in primary documents, we have included the text of the legislation as well budget scoring from the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT), on the COHEAO website.  Links are below: