President Obama, whom college kids overwhelmingly favored in Tuesday's election, vowed on the campaign trail to increase federal financial aid. But experts say a divided Congress could put those changes on hold -- and lead to higher college costs for many families.
Automatic spending cuts that are set to kick in at year-end -- as part of the so-called fiscal cliff -- could result in an 8% cut in federal aid. Obama's aides have said the president plans to move quickly to find common ground with Republicans over the $1.2 trillion in overall cuts.
If they do begin as scheduled, however, cuts would come at a time when federal financial aid is already on the decline. According to a report released last month by the College Board, federal grants totaled $49 billion during the last academic year, down 5% from a year prior, after adjusting for inflation -- the first drop after rising for five consecutive years. Federal work study, which allows colleges to create campus-based jobs for students, fell 4% to $972 million, after adjusting for inflation, the first time it's dropped below the $1 billion mark in at least a decade.
And college experts caution that even more cuts could kick in starting next fall. Next year, the Higher Education Act, a major piece of legislation that for decades has helped determine how much college aid -- including grants and loans -- the federal government provides, is up for reauthorization. If it isn't renewed next year, there's an automatic one-year extension of the current rules giving students one more academic year of breathing room before changes kick in.
But some experts say even the best-case scenario will leave families worse off than this year. That's largely because no matter what happens to financial aid -- even if it stays the same or increases -- it won't keep up with the rate at which tuition is rising, says Mark Kantrowitz, publisher of FinAid.org, which tracks financial aid issues.
While there's still time before any of these decisions are made, college advisers say families should prepare for the possibility of less aid by broadening their financial aid search from now. That includes contacting colleges' financial aid offices for school grants and searching for scholarships in their community and on sites like Fastweb.com (Kantrowitz is also publisher of this site) and CollegeBoard.org . High-school seniors might also want to consider applying to public in-state colleges, since their tuition costs are significantly lower than private colleges.
In the meantime, here are three types of financial aid that could see changes in 2013.
About 9 million undergraduates received federal Pell grants to help cover tuition costs in 2010-11, according to the latest data from FinAid.org. The latest Consolidated Appropriations Act that was signed into law last December, which set most federal agencies' budgets for 2012 (and was later extended to March 2013), scaled back spending for this grant program.
Those cuts could be made permanent (or at least longer lasting) when the Higher Education Act is reauthorized, says Kantrowitz. They include reducing the number of semesters students can get a Pell grant from 18 to 12. And while it used to be that families with $32,000 or less in income could qualify for the full Pell grant amount -- that's $5,500 this year -- that eligibility threshold has been lowered to families with $23,000 or less in income.
Federal student loans
In late June, Congress voted to extend the 3.4% fixed rate on the subsidized Stafford loan, in which the federal government covers the interest on the loan while the student is in college, for one more year through June 2013. Without intervention, the rate would have doubled to 6.8%. Families shouldn't bet on another extension this summer. Kantrowitz says all sorts of plans are on the table for this loan, including possibly eliminating the subsidized interest program entirely. The one-year freeze on the interest rate for this loan will cost the federal government $6 billion, according to the Congressional Budget Office.
Also on the table is a proposal to change the way rates on federal loans are determined, namely to move away from fixed rates to so-called fixed variable rates. Under this proposal, loan rates would be determined by the "constant maturity Treasury rate" plus three percentage points when borrowers sign up. The interest rates on a borrower's loans would be fixed, but new loans each year would be at a different fixed rate based on prevailing interest rates, says Kantrowitz. Critics of the current system say that federal loan rates don't reflect the low-rate environment, costing borrowers thousands of dollars extra in interest payments. This proposed model, if enacted, would lead to savings as long as market rates remain low. But once they rise, the proposed new loans doled out could become more expensive than they are now.
College tax credits
Tax credits for college expenses, though not determined by the Higher Education Act, are caught up in the fiscal cliff. Provisions for the American Opportunity Tax Credit, which allows families to get a tax credit of up to $2,500 per year for up to four years, are scheduled to expire at the end of the year. Unless Congress acts, savings for tax payers will be scaled back to a maximum of $1,900 per year for two years.
President Obama has said he wants to make the American Opportunity Tax Credit permanent, though he could face resistance from Republicans. Since the higher limits went into effect for the 2008-09 academic year, tax credit funding for families has increased 151% through 2011-12, according to the College Board.