Federal Policy Update
To:        AASCU Presidents and Chancellors
From:   Ed Elmendorf, Sr. Vice President of Government Relations and Policy Analysis
             Robert L. Moran, Director of Federal Relations and Policy Analysis
Re:       Federal Debt-Limit Discussions
Date:    July 26, 2011
 
*** Information Advisory ***
 
Last night President Barack Obama and the Speaker of the House, John Boehner, provided the nation with two perspectives on the current debt-limit situation. On August 2, the federal government will reach its borrowing limit. The net effect of this is that the government will not be able to pay all of its federal obligations. To put this in real terms, for just the month of August, the federal government is expected to receive approximately $170 billion in revenue; however, funding obligations total $350 billion. The problem is quite clear. It should be noted that about $20-$25 billion of that amount will be used to pay the interest on our current debt.
 
Late yesterday, both Speaker Boehner and Majority Leader of the Senate, Harry Reid, introduced competing debt limit bills. The Boehner package is a “two-step” process that would provide for a $900 billion increase in the debt limit, an amount projected to allow borrowing into early next year. In addition, it calls for $1.2 trillion in spending reductions over the next 10 years in the first step. As the second step, the Boehner bill would create a commission tasked with finding an additional $1.8 trillion in budget savings by the end of the calendar year. Congress would pass the recommendations of the commission and upon passage would provide the President with the authority to raise the debt limit an additional $1.6 trillion, subject to the disapproval of Congress. Mr. Reid’s measure would increase the debt limit by $2.7 trillion, an amount projected to be sufficient through the end of 2012. In addition, his measure calls for $2.7 trillion in federal savings over the next 10 years.
 
Both measures include provisions to eliminate the federal government’s payment of in-school interest subsidies for loans issued to graduate and professional students. The savings derived from eliminating these payments would be channeled toward the Pell Grant Program, reducing the need for dramatic changes to the program. Currently, the Pell Grant Program would require $34 billion in order to fully fund the program in FY12; however, its FY11 funding level is $23 billion, resulting in an $11 billion funding gap. In FY12, the Reid proposal would direct $10.5 billion toward Pell in FY12 and $7.5 billion in FY13. The Boehner measure would direct $9 billion toward Pell in FY12 and $8 billion in FY13.
 
While AASCU is not taking an official stand on either measure, we are encouraged and appreciate the recognition of the importance of the Pell Grant Program to provide access for low-income students to postsecondary education. The fact that both bills provide a nearly complete solution to the funding dilemma is truly unexpected and should be applauded; however, the called for cuts in discretionary funding will affect other higher education programs, including research accounts that will potentially have serious impact. AASCU will continue to monitor the situation and provide further updates as warranted.
 
Below are bullet summaries of each proposal.
 
Reid Proposal (Senate)
  • Provides $10.5 billion of the $11 billion needed to fully fund the Pell Grant Program in FY12.
  • Provides $7.5 billion to the Pell Grant Program in FY13.
  • Savings are generated from eliminating the in-school interest subsidy for graduate and professional students. ($18.4 billion over 10 years). 
  • Increases the debt limit by $2.7 trillion immediately.
  • Calls for $2.7 trillion in deficit reduction as follows:
    •    $1.2 trillion in discretionary savings over 10 years.
    •    Assumes $1 trillion in savings from declining war costs.
    •    $100 billion in savings from government waste.
    •    Creates a 12-member committee to recommend ideas totaling 3% of GDP toward deficit reduction.
Boehner Proposal (House)
  • Provides $9 billion of the $11 billion needed to fully fund the Pell Grant Program in FY12.
  • Provides an additional $8 billion to the Pell Grant Program for FY13.
  • Savings are generated from two sources:
    • Eliminate the in-school interest subsidy for graduate and professional students. ($18.4 billion over 10 years). (This elimination does not apply to students enrolled in a program leading up to a degree or certificate or students enrolled in a program necessary for a teaching credential or certification where such credential or certification is required by the state. This exception is not in the Senate bill.)
    • Terminate the .5% origination fee rebate after 12 consecutive on-time payments ($3.2 billion).
  • Devotes the remaining $4.6 billion toward deficit reduction.
  • Establishes a two-step process to secure $3 trillion in deficit reduction.
    • First-step: $1.2 trillion over ten years through reduced discretionary spending levels.
    • Second-step: Creates a Commission of 12 Members of Congress (6 Senators and 6 House Members) to recommend $1.8 trillion in budget savings.
  • Increases the debt limit by $2.5 trillion.
    • Grants authority to the President to raise debt limit subject to vote of disapproval by Congress.
    • The limit may be raised $900 billion initially.
    • Upon adoption of the $1.8 trillion in savings as recommended by the Commission, authority to raise an additional $1.6 trillion.
 


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