Posted Date: March 1, 2013

Author:  David A. Bergeron, Acting Assistant Secretary

Subject: Impact of Sequestration on the Title IV Student Financial Assistance Programs

On August 2, 2011, Congress passed the Budget Control Act (BCA) of 2011, which put into place an automatic process of “across-the-board” Federal budget cuts, known as the sequester, to take effect if Congress failed to enact legislation to reduce the Federal deficit.  Unless Congress acts by March 1, 2013, these budget cuts will go into effect.

The Department is preparing more detailed guidance for students and institutions about how the sequester will affect the Federal Title IV student financial assistance programs.  In the meantime, this Electronic Announcement provides the financial aid community with general information on how the sequester will impact those programs.

Federal Pell Grant Program

The Balanced Budget and Emergency Deficit Control Act of 1985, as amended (BBEDCA), specifically exempts the Pell Grant Program from the effects of the sequester. Therefore, both the 2012-2013 Award Year Pell Grant Payment Schedules, as well as the 2013-2014 Award Year Payment Schedules that were released on January 30, 2013 in “Dear Colleague Letter” GEN-13-06, will be unchanged under the sequester.

FWS and FSEOG Programs

The campus-based programs are fully funded at the start of the award year.  Therefore, the Federal Work-Study (FWS) and Federal Supplemental Educational Opportunity Grant (FSEOG) programs for Award Year 2012-2013 were fully funded in Federal fiscal year 2012 and are unaffected by the sequester.

However, under the sequester, Award Year 2013-2014 funding for FWS and FSEOG would be reduced by a total of approximately $86 million. The Department will include the reduction when it uses the expected reduced final full-year appropriation in the institutional allocation formula, which will result in final FWS and FSEOG institutional allocations that are expected to be released later this Spring.

Federal Direct Loan Programs

The sequester does not change the annual or aggregate loan limits for  Direct Loan Program loans, or the rules governing a student’s (or parent’s) Direct Loan eligibility.  However, the BBEDCA did specify that certain loan fees paid by borrowers be increased during the time the sequester is in effect, as follows:

  • For Direct Subsidized and Direct Unsubsidized Loans where the first disbursement of the loan is after the sequester takes effect, the current loan fee of 1 percent of the principal amount of a loan will increase. We presently anticipate that the rate will increase to approximately 1.05 percent. With such an increase, for example, the fee on a loan for $5,500 would increase from $55.00 to $57.75, an increase of $2.75.  We will provide the actual increased percentage when it becomes available.

  • For Direct PLUS Loans for both parent and graduate and professional student borrowers where the first disbursement of the loan is after the sequester takes effect, the current loan fee of 4 percent will increase. We presently anticipate that the rate will increase to approximately 4.20 percent. With such an increase, for example, the fee on a $10,000 Direct PLUS loan would increase from $400.00 to $420.00, an increase of $20.00. We will provide the actual increased percentage when it becomes available.

The Department’s Federal Student Aid (FSA) office has begun developing the processes necessary to implement the higher loan fees mandated by the sequester. One step is informing borrowers of the increased fee percentage so they have the opportunity to cancel or reduce their loan.  FSA plans to send email (and where necessary, paper) notifications to student and parent borrowers who have a Direct Loan where the first disbursement occurs during the period of the sequestration. The notification will advise borrowers of the increased loan fee percentage and advise them that if they wish to cancel or reduce the amount of the loan they should contact the financial aid office at their school.

Subsequent to the sequester order, FSA will provide institutions (and their software vendors) with details on when and how their institutional systems must be changed to ensure that Direct Loan origination records are submitted with the updated loan fee amounts. In the meantime, institutions should continue their normal procedures for awarding and disbursing Direct Loans and for submitting Direct Loan records to the Department’s Common Origination and Disbursement (COD) system.

Iraq - Afghanistan Service Grants

The Iraq - Afghanistan Service Grant (IASG) Program is also subject to the across-the-board budget cuts under the sequester law.  The IASG 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.

Under sequestration any reduction in the amount of an Iraq - Afghanistan Service Grant would only apply to awards where the first disbursement was made during the time the sequester is in effect.  Until we are able to provide further guidance on the timing and amount of the sequester required reductions, we recommend that institutions not make a first disbursement of an Iraq - Afghanistan Service Grant to a student.

TEACH Grants

The Teacher Education Assistance for College and Higher Education (TEACH) Grant program is also subject to the across-the-board budget cuts under the sequester law.  The TEACH Grant program provides grants to students who are completing, or plan to complete, coursework needed to begin a career in teaching and who 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. 

Any reduction in the amount of a TEACH Grant would only apply to awards where the first disbursement was made during the time the sequester is in effect.  Until we are able to provide further guidance on the timing and amount of the sequester required reductions, we recommend that institutions not make a first disbursement of a TEACH Grant to a student.

Summary

The following is a summary on the impact of sequestration of the Title IV student assistance programs:

  • Federal Pell Grant Program – No impact.

  • FWS and FSEOG Programs – No impact for 2012-2013, but funding reduced for the 2013-2014 award year.

  • Direct Loan Programs – Increase in Loan Fees for Direct Subsidized and Direct Unsubsidized Loans and for PLUS Loans.

  • Iraq - Afghanistan Service Grant Program – Reduced award amount for any grant that is first disbursed during the time the sequester is in effect.

  • TEACH Grant Program - Reduced award amount for any grant that is first disbursed during the time the sequester is in effect.

We will provide additional updates as more information becomes available.

   

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