Here we go again.
I’m sure many of you by now have heard about sequestration. But what is it exactly, and how will it impact student loan borrowers?
If you remember, back in December we were dealing with the fiscal cliff. This was a combination of tax increases and automatic spending cuts (called sequestration) that were scheduled to go into effect on January 1, 2013, if Congress and the President could not work out a deal to replace the automatic increases and spendings cuts with something else. The automatic spending cuts were put in place because Congress and the President were unable to reach an agreement on how to reduce the deficit; the idea was that these automatic cuts would force everyone to compromise and come up with a better way of reducing the deficit. If they could not reach a deal to avert the fiscal cliff, everyone’s taxes would go up, and government spending would be cut across the board, impacting nearly every federal program (including defense spending). Luckily, just as we were going over the cliff, Congress and the President made a deal: tax increases would be avoided for everyone except the highest income thresholds, and sequestration would be delayed until March 1. It was hoped that this would give everyone extra time to come together and figure out a way to avoid sequestration through other long-term targeted spending reductions and, depending on what side of the aisle you’re on, perhaps entitlement reform and some additional revenue (such as by closing tax loopholes).
Well, we’re now in the last week of February, and (shocker!) there’s no deal. That means that on March 1, the automatic spending cuts known as the sequester will go into effect. The impacts of these spending cuts will start to be felt throughout the spring and into the summer if Congress and the President can’t work out a deal. Here are some ways that sequestration may hit students and graduates:
- Fewer Pell Grants. Pell Grants are financial aid awards that are provided directly to low-income students by the federal government. They are grants, not loans, and do not have to be repaid. Thus they help many borrowers avoid taking out additional student loans to cover their educational expenses. Unfortunately, we might see reduced and/or fewer Pell Grant awards as a result of the budget cuts.
- Reduced federal student loan subsidies. One of the benefits of many federal student loans is the coverage of interest by the government during certain times, notably during and immediately after school enrollment. This saves borrowers money in the long run by reducing the cost of borrowing. It will be harder to maintain interest subsidies in the wake of widespread budget cuts.
- Decreased research money available to colleges and universities. Many educational institutions depend on federal grants to fund their research. If those funds are cut, schools have less money to work with. This could cause colleges and universities to offer less-generous financial aid packages to their students, which would mean that students will shoulder more of the cost of education.
- Federal employee furloughs. Spending cuts will hit every federal agency, including the U.S. Department of Education. Every federal agency is talking about the need to force federal employees to take days, if not weeks, of unpaid leave (called furloughs) due to budget cuts. This is not good for the U.S. Department of Education which already has tons of problems related to federal loan servicing. Fewer people will mean longer wait times for student loan borrowers, longer processing times for consolidation and repayment plan applications, and more mistakes made by overworked employees.
To read more about the sequester, click here.