The Sequester and Student Loan Cuts: A Scorecard


NEW YORK (MainStreet)—Ask most people what the Budget Control Act of 2011 is, and you will likely get a blank stare. Now ask what the "sequester" is, and you'll probably see a glimmer of recognition -- followed by a blank stare. The Budget Control Act raised the federal debt limit to prevent a default -- with the understanding that there would eventually be a solution to cut the deficit and a crisis would be avoided.

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But like Cinderella's coach turning into a pumpkin at midnight, The Budget Control Act morphed into the sequester at 12 a.m. on March 1, 2013, after Congress failed to produce a deficit reduction bill. At least $1.2 trillion in cuts to the federal budget, split between domestic discretionary spending and defense, are to be made over ten years, with the first $85 billion coming this year.

The term " sequestration" has been used to describe a process where the federal government, in effect, takes back money after Congress approves it. Funds are removed, or sequestered, so federal agencies can't spend them. Budget cuts from the sequester have affected people from all walks of life -- including those with student loans.

What follows is a summary of the impact of those budget cuts on specific federal student aid programs.

The Pell Grant Program

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Federal law specifically exempts the Pell Grant Program from the effects of the sequester. Therefore, the maximum Pell Grant award for the current 2012–13 award year remains at $5,550, and the maximum Pell Grant award for the upcoming 2013–14 award year remains at $5,645.

The Federal Direct Student Loan Program

While the sequester does not change the amount, terms or conditions of Direct Loans, it does raise the loan fee paid by borrowers for Direct Loans disbursed after March 1, 2013.

For a Direct Subsidized or Direct Unsubsidized Loan, the loan fee will increase from 1.0% of the principal amount of a loan to 1.051%. For example, the fee on a loan for $5,500 will be increased by $2.80 from $55.00 to $57.80.

For Direct PLUS Loans for both parent and graduate student borrowers, the loan fee will increase from 4.0% to 4.204%. For example, the fee on a $10,000 Direct PLUS Loan will be increased by $20.40 from $400.00 to $420.40.

The Department of Education will be notifying borrowers individually of these fee increases and providing them with additional information.

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Iraq and Afghanistan Service Grants

The Iraq and Afghanistan Service Grant is provided to certain students whose parent or guardian was a member of the U.S. armed forces and died as a result of military service performed in Iraq or Afghanistan after the events of 9/11. Award amounts for any Iraq and Afghanistan Service Grant that is first disbursed after March 1, 2013 must be reduced by 10.0% from the award amount for which a recipient would otherwise have been entitled. For example, the 2012–13 maximum award of $5,550 is reduced by $555.00, resulting in a maximum award amount of $4,995.00 for that year. The 2013–14 maximum award of $5,645 is reduced by $564.50, resulting in a maximum award of $5,080.50.

Teacher Education Assistance for College and Higher Education (TEACH) Grants

The TEACH Grant program provides grants to students who are completing, or plan to complete, coursework needed to begin a career in teaching and agree to teach, for at least four complete academic years, in a high-need field at an elementary school, secondary school, or educational service agency that serves students from low-income families. Award amounts for any TEACH Grant that is first disbursed after March 1, 2013 must be reduced by 6.0%from the award amount for which a recipient would otherwise have been eligible.

The Office of Management and Budget (OMB) is charged with determining the dollar amount of sequester-mandated cuts and instructing federal agencies on implementation. "The law governing the sequester called for required reductions in specific programs and OMB calculates what these percentages are," said a source at the Department of Education who spoke on background. "Should another recalculation occur, we will post an updated electronic announcement."

Financial aid administrators who are affected by OMB's calculations follow updates on the Department of Education's Website, where memos have been posted by Jeff Baker, Division of Policy Liaison and Implementation.


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What are the prospects for restoring those 2013 reductions?

"The President's budget for 2014 proposes to reverse the sequester cuts in all 10 years, from 2013 and on," said the source, "through a balanced package of alternative spending cuts and tax increases that would reduce the deficit by a similar amount to the across-the-board cuts."

"Not a lot folks think there is much hope for reversing the 2013 cuts," the source added, noting that Congress was moving too slowly to do anything before the end of 2013. "But there is always a chance."

--Written by John Sandman for MainStreet

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