The Congressional Budget Office (CBO) has proposed cuts to three areas of financial aid spending in its annual report, “Reducing the Deficit: Spending and Revenue Options.”  

To reduce spending on student aid, the CBO proposes the elimination of subsidized loans to graduate students, a change in the interest rate structure for student loans and tighter eligibility criteria for the Pell Grant program.

“Under current law, students with an expected family contribution (EFC) exceeding 95 percent of the total maximum Pell grant award ($5,273 for academic year 2010-2011) are ineligible for a grant,” the CBO report states. “This option would make students with an EFC exceeding $2,500 ineligible for a Pell grant.”

Restricting the Pell Grant to the neediest students, the CBO argues, would focus the grant program on students with the greatest need.

Assuming that the maximum discretionary award level remains at $4,860 in future years, the CBO estimates that this option would yield discretionary savings of $2 billion through 2016 and $7 billion through 2021, along with accompanying mandatory savings of about $1 billion through 2016 and $5 billion through 2021.

The CBO report argues that eliminating subsidized loans for graduate students would help focus federal financial aid priorities on what some people consider the federal government’s primary responsibility — making higher education accessible to high school graduates.

“This option would end, in 2012, the practice of making new subsidized loans to graduate students, on the presumption that those students would generally take out unsubsidized loans instead,” the CBO report states. “The option would reduce federal outlays by more than $8 billion from 2012 to 2016 and by about $18 billion from 2012 to 2021.”

Additionally, the report proposes changing the structure of interest rates on federal student and parent loans to resemble those on fixed-rate mortgage loans.

“In particular, the interest rate on new loans would depend on conditions in financial markets at the time of origination but remain fixed for the life of the loan,” according to the report. “Under this option, the interest rate on all new federal student and parent loans would be set to the interest rate on 10-year Treasury notes at the beginning of the academic year in which the loan is originated plus 3 percentage points.”

The CBO estimates this option would reduce federal outlays by $900 million from 2012 to 2016 and by $52 billion from 2012 to 2021.

“Currently, the interest rate on all new unsubsidized and subsidized loans to non-undergraduate students is 6.8 percent,” the report states. “On all new PLUS loans, the interest rate is 7.9 percent. For the 2011-2012 academic year, the interest rate on new subsidized loans to undergraduate students will be 3.4 percent, but for all subsequent years, that rate will be 6.8 percent because of the expiration of a provision in the College Cost Reduction and Access Act of 2007.”

Congress has yet to finalize a budget for the remainder of fiscal year (FY) 2011, which ends Sept. 30, and is beginning debates on the FY2012 budget.