Republicans May Propose Cuts To Federal Student Aid

Republicans in Congress have proposed a “menu” of potential cuts to trim federal funding. However, several potential spending cuts will affect college affordability – from student loan repayment to financial aid programs.

Overall, the savings from these spending cuts are relatively low as compared with other options, such as establishing a 10% tariff, cuts to Medicare/Medicaid and eliminating the home mortgage interest deduction, which would save trillions of dollars.

These spending cuts would save only about $40 billion a year, with one third of the savings coming from the repeal of the SAVE repayment plan. 

What’s on the table? Let’s break it down.

Can Republicans Make Massive Changes?

Passage of Republican priorities, including an extension to the Tax Cuts and Jobs Act of 2017, may require a repeal of several forms of federal student aid. 

Even though Republicans control the 119^th Congress, they do not have a 60-vote supermajority in the U.S. Senate and they have a narrow margin in the U.S. House of Representatives. There are 53 Republicans, 45 Democrats and 2 Independents in the Senate. There are 218 Republicans, 215 Democrats and 2 vacancies in the House. 

If legislation does not have bipartisan support, Democrats can filibuster most legislation in the Senate. 

The main exception is a budget reconciliation bill, which requires just a simple majority for passage. But, budget reconciliation bills must cut the budget deficit through either revenue increases or spending cuts, or a combination. Any increase in spending must be offset through savings elsewhere.

The Tax Cuts and Jobs Act of 2017, for example, was passed in this manner. Assuming they do get the votes needed, here’s what some of the potential changes are.

Changes To Education Tax Provisions

Several education tax breaks may be repealed to offset an increase in costs.

• The American Opportunity Tax Credit (AOTC) provides a partially-refundable tax credit worth up to $2,500 per year per student for up to four years based on amounts spent on tuition, textbooks, supplies and equipment. Repealing it would save about $5.9 billion per year.
• The Lifetime Learning Tax Credit (LLTC) provides a non-refundable tax credit worth up to $2,000 per year per taxpayer based on amounts spent on tuition, textbooks, supplies and equipment. Repealing it would save about $2.6 billion per year.
• The exclusion from income for qualified scholarships and fellowships provides tax-free status for scholarships and fellowships that are used to pay for tuition, textbooks, supplies and equipment. Repealing it would increase revenue by about $5.4 billion per year.
• The Student Loan Interest Deduction is an above-the-line exclusion from income for up to $2,500 in interest paid on federal and private student loans. Repealing it would save about $3.0 billion per year. 

There is a proposal to increase the tax on net investment income for college endowments. 

• Currently, 58 colleges that enroll at least 500 students have endowments of at least $500,000 per student. These colleges pay a tax of 1.4% on their endowment’s net investment income, yielding $244 million per year.
• Increasing the tax rate from 1.4% to 14% would increase revenue by about $2.2 billion per year.
• A proposal to incentivize colleges to spend more of their endowments on students would increase the number of colleges subject to the endowment tax by 10 to 12 colleges. This would increase revenue by about $27.5 million per year. 

“58 colleges have endowments of at least $500,000 per student. Increasing the tax rate on endowments could raise about $2.2 billion per year.”

Student Loan Changes

In addition to repealing the Student Loan Interest Deduction, several proposals would make cost-saving changes to federal student loan programs.

• Repeal the SAVE repayment plan and streamline income-driven repayment plans. All current repayment plans would be replaced with just two repayment plans for new loans made on or after July 1, 2024: standard repayment plan and a new income-driven repayment plan. This would save about $12.7 billion per year. 
• Eliminate Grad PLUS and Parent PLUS loans for new borrowers as of July 1, 2025 and new PLUS loans for all borrowers by 2028. Establish new annual and aggregate loan limits for federal student loans. This will save about $1.9 billion per year. 
• Eliminate subsidized Federal Direct Stafford Loans, so that all new federal education loans will be unsubsidized. This will save about $1.5 billion per year.
• Create risk-sharing for federal student loans and create the PROMISE Grants program. Colleges will be required to make annual risk-sharing payments based on their students’ repayment activity. This would fund the Promoting Real Opportunities to Maximize Investments and Savings in Education (PROMISE) grant, which would improve college affordability and college success. Risk-sharing net of the PROMISE grants will save about $1.8 billion per year. 
• Repeal some of the regulatory changes made to the closed school discharge, such as the automated process for discharging loans made to borrowers who attended schools that closed. This will save about $490 million per year. 
• Repeal some of the regulatory changes made to borrower defense to repayment discharge, such as the changes that made it easier for a borrower to discharge their loans due to a college’s misconduct. This will save about $970 million per year. 
• Limit the regulatory authority of the U.S. Department of Education to create new regulations that increase the cost of federal student loans or that would have economically significant effects. Economically significant effects have an impact of $100 million or more per year or which adversely affect the economy in a material way. This would save about $3.0 billion per year. 

There are some proposals for which the cost savings have not yet been estimated. 

• Replace the federal need analysis formula used to calculate federal student aid eligibility. The definition of financial need would be based on the national median cost of attendance of similar degree programs instead of the college’s actual cost of attendance. In addition, Federal Pell Grant eligibility would be capped at the median cost of attendance. 
• Make changes to reduce eligibility for Public Service Loan Forgiveness (PSLF). In addition, a proposal to tax non-profit hospitals as ordinary for-profit businesses, which would save $26 billion a year, might reduce opportunities for partial student loan forgiveness earned by doctors during their residencies and internships. 
• Make changes to expand Gainful Employment by establishing minimum levels of performance for programs to participate in Title IV federal student aid programs. 

There are also some proposals that will increase costs.

• Eliminate interest capitalization on federal student loans. This will increase costs by about $380 million per year. 
• Allow borrowers to rehabilitate defaulted loans a second time. This will increase costs by about $13.8 million per year.
• Repeal the 90/10 rule, where for-profit colleges must get no more than 90% of their revenue from federal financial aid (including veterans education benefits). This will cost about $160 million per year. 

What May Happen In The Future

It’s impossible to know for certain which (if any) of these changes may pass through to final bills and eventually be approved. However, any of these alone could make higher education more expensive for students and their families.