Good news from Congress on spending is rarely unaccompanied by
bad news. The good news is that Congress and the Administration
have identified wasteful spending that can be cut as part of the
reauthorization of the federal government's main higher education
spending programs. Decades ago, the government put in place large
subsidies to entice lenders to participate in federal student loan
programs. Today these programs are popular, the lenders plentiful
and highly profitable, and the subsidies unneeded. Following the
Administration's lead, the House Education and Workforce Committee
reported a bill that would largely eliminate these subsidies,
saving almost $38 billion over the next 10 years.
The bad news is that Congress may use most of the savings to
increase other spending, including the creation of nine new
entitlements in the House bill. While a tiny amount of the
mandatory savings-$914 million-would be used for deficit reduction
between 2008 and 2017, the bulk of the savings-some $37
billion-would be plowed right back into new spending.
Reflecting the Washington mindset, neither the House bill nor
its companion legislation in the Senate includes a dime of tax
relief. This is the wrong tack to take. A significant portion, if
not all, of the savings should be returned to taxpayers in the form
of education-oriented tax relief, such as an expansion of the
higher education deduction.
Almost half of the savings in the House bill will be used to
reduce the interest rates on student loans. Under current law, the
interest rate for both subsidized and non-subsidized student loans
is 6.8 percent. Under the House bill, the rate for subsidized loans
would gradually fall, reaching 3.4 percent in 2012. The problem is
that after 2012, the interest rate returns to 6.8 percent.
Obviously, this would create enormous pressure in 2013 to maintain
the subsidized lower rates, but the House bill irresponsibly leaves
this problem to future Congresses.
The other core federal support program for students in college
is the Pell grant program. The House bill authorizes a significant
increase in the maximum Pell grant award. The maximum award level
for the Pell program for the 2007-2008 academic year is $4,300. The
House bill authorizes a maximum award for the following year of
$7,600, rising each year to reach $11,600 for 2012-2013.
Pell grants are given each year to millions of students to help
defray the cost of higher education. The program and the
provisional maximum grant award levels are authorized in
legislation, such as H.R. 2669. Actual spending, however, is
subject to annual appropriation, which means the amount spent must
be appropriated by Congress each year in legislation signed by the
President. Typically, the appropriations process lowers the maximum
grant award level from that specified in the authorizing
legislation, so the maximum awards specified in the authorization
have little meaning.
The House legislation would also create nine new mandatory
programs-or entitlements. These programs are called "mandatory"
because they operate on autopilot, without annual appropriations;
Congress does not even have to pass a budget for them. One of these
programs is a new mandatory Pell grant add-on. That means Pell
grants could be larger and the increases would come year after year
without additional action by Congress.
If this new Pell grant add-on becomes law, the Pell program is
likely, over time, to transform into a mandatory-or
entitlement-program. History has shown that when Congress creates a
new mandatory spending program, spending quickly grows out of
control. One recent example is the State Children's Health
Insurance Program (SCHIP), the reauthorization of which Congress is
now debating. SCHIP has already expanded well beyond the target
population it was initially intended to cover (children ineligible
for Medicare but without private coverage) and may, depending on
the legislation passed this year, grow to cover a sizeable
proportion of middle-class adults while doubling SCHIP costs.
Growing on autopilot, federal entitlement spending-such as on
Social Security, Medicare, Medicaid, and veterans health-is already
soaring. Congress should not make matters worse by creating yet
another exploding entitlement program.
New Unnecessary Subsidies
The House bill also goes off track by creating a new student loan
forgiveness program for public-sector borrowers. Under the program,
graduates with loans who go to work for the government in an
approved job for a sufficient period would have a portion of their
loans forgiven. When a portion of a loan is forgiven in this
manner, that part of the loan becomes, in effect, a grant.
There is no reason to give public-sector workers a financial
benefit unavailable to those who work in the private sector.
Congress is already intent on increasing the size of grants to
students. It should not explicitly discriminate against students
who choose to work in the private sector.
The reauthorization of the federal higher education programs
should be used as an opportunity to reprioritize and, where
possible, reduce federal spending-not as an excuse to create still
more programs. Having found a good place to cut spending, Congress
should return most of the savings to taxpayers through
education-oriented tax relief and direct the balance to the core
federal higher education mission of helping students pay for
college. Above all, Congress should not use the occasion of the
higher education reauthorization to create new and ultimately
unaffordable entitlement programs.
J.D. Foster, Ph.D.,
is Norman B. Ture Senior Fellow in the Economics of Fiscal Policy
in the Thomas A. Roe Institute for Economic Policy Studies at The