The Prosper Act will increase spending on higher education

The Prosper Act will increase spending on higher education
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Late last year, House Republicans proposed a major reform of the federal government’s student aid programs for higher education. The Congressional Budget Office recently released its official score of the bill, which is dubbed the Prosper Act. Republicans have latched onto the score to defend the bill as an act of fiscal responsibility, while Democrats and advocates have labeled the bill as a cut to student aid, claiming it slashes benefits and “hits students hard.”

But both groups are wrong. The best available estimate of the bill’s impact shows that it would actually increase federal spending on student aid over the next 10 years. At first glance, the CBO estimate for the Prosper Act appears to show savings for the government. The first table in the report lists a $14.6 billion spending cut over the coming decade. But that figure, which has often been cited in media coverage of the score, refers to only one side of the federal budget: the entitlement side. That’s where the changes to student loan programs show up, so the projected $14.6 billion in savings largely reflects the elimination of loan forgiveness benefits that flow disproportionately to borrowers with expensive graduate degrees.

The Prosper Act includes more than changes to student loans, however, and it’s these changes that turn the bill from a money saver to a net cost. The bill also reforms the Pell Grant program, which provides grants to undergraduates with low and middle incomes. Specifically, the bill includes a number of regulatory changes that increase the number of students eligible for Pell Grants. The CBO estimates that under the Prosper Act, an additional 1.1 million students would receive grants relative to current law.

Boosting the number of students receiving Pell Grants costs money. Some of those costs are already reflected in the $14.6 billion figure cited by many media outlets. But the majority of the increase in Pell Grant spending would happen under a separate part of the budget: the discretionary side. Discretionary spending is subject to annual appropriations, unlike entitlement spending on student loans. Normally, that causes observers to ignore proposed increases in discretionary spending. The increases are, after all, contingent on some future appropriation bill and are often not fully funded, at least not at the levels spelled out in the authorizing law, such as the Prosper Act.

Pell Grants are something of an exception to that rule, so it’s misleading to ignore how the Prosper Act would affect discretionary Pell spending. Pell Grants operate like an entitlement. The law defines a per-student grant that the appropriations committee is under significant pressure to fund each year, lest it be blamed for cutting Pell Grants. Indeed, Congress hasn’t cut the maximum Pell Grant from its prior year level for more than two decades.

The CBO estimates that if the Prosper Act is enacted appropriators would have to spend an additional $16.8 billion on the discretionary side to keep Pell Grants fully funded over the next 10 years. A comprehensive picture of the Prosper Act’s effects on student aid funding should include discretionary spending. Far from slashing $14.6 billion from federal student aid, the bill would actually increase spending on student aid by a net $2.2 billion over the next 10 years.

But even that is too optimistic. The $2.2 billion estimate relies on outdated rules for estimating the cost of student loans. Though these rules are required by law, the CBO itself argues that they are not comprehensive. Using better accounting practices, the agency estimates that the Prosper Act’s changes save far less than under the official rules. Estimates that incorporate both the discretionary side of the Pell Grant program and more comprehensive accounting rules show that the Prosper Act will increase spending on federal student aid, not by $2.2 billion, but by $11.7 billion over the next 10 years.

Far from “slashing” spending on higher education, the Republican bill will increase it. While that might upset some Republican lawmakers, at least the bill addresses one of the most misplaced priorities in the student aid programs: It reverses the large increases in loan forgiveness benefits for graduate students enacted under the Bush and Obama administrations. The bigger question in light of this new information is whether those who have derided the bill for cutting student aid will continue to do so.

Jason Delisle is a resident fellow focused on higher education financing at the American Enterprise Institute. Preston Cooper is a research analyst focused on education at the American Enterprise Institute.