The Budget Control Act of 2011 intended to force Democrats and Republicans to collaborate on deficit reduction by threatening automatic spending cuts if no agreement was reached. Unfortunately, the two parties were unable to resolve their differences, resulting in drastic cuts to most federal agencies.
Funding for Federal Supplemental Educational Opportunity Grants, which goes to students in “exceptional need,” will be cut by $37 million while funding for federal work-study grants will be cut by $49 million. Though this is only a 5-percent cut, as many as 70,000 students will be negatively affected by these reductions, potentially forcing some to drop out of college or get an extra job. In the 2010–2011 academic year, 44 percent of UCSD students received Pell Grants. Although these will not be affected in the first year of cuts, these grants could soon be endangered.
Furthermore, loan origination fees for Direct PLUS parent loans are expected to increase from 4 percent to 4.2 percent on loans disbursed after March 1, 2013. Although this is a small hike, this further increases the debt load students are mired in. Outstanding student debt in the U.S. already exceeds $1 trillion.
At UCSD, 52 percent of students graduated with debt in 2011, with an average debt of $19,936. UCSD will continue to receive its “base guarantee” of federal funding based on previous years’ funding distribution, but will not receive its “fair share increases” if a higher than normal proportion of low-income students enroll. The National Association of Student Financial Aid Administrators estimates that UCSD will lose about $60,000 in funds for opportunity grants and $91,000 for work-study grants in the next academic year.
Rising student debt also affects the housing market recovery. Debt-to-income ratio, the percentage of a person’s gross monthly income used to pay debt, rose from 43 percent in 2002 to 49 percent in 2012 for the average single student debtor. This disqualifies many for mortgages. Only 9 percent of 29 to 34-year-old adults got a first time mortgage between 2010 and 2011 compared to 17 percent 10 years ago. A weak housing market is another drag on consumer demand since people aren’t spending money furnishing their homes.
U.S. Secretary of Education Arne Duncan also expects that sequestration will require employee furloughs, which complicates fraud and waste investigations. According to internal audits, fraud rings cost federal student aid funds $187 million between 2009 and 2012. Fraudulent payments for Pell Grants in the fiscal year 2011 were estimated at $993 billion.
If Congress apportioned enough resources to decreasing financial aid fraud, it could easily avoid reducing grants for low-income students. Instead, students, who already face a poor job market upon graduation, will be promised more debt.
