President's Education Budget Proposal: FY08

As in past years, the President’s Budget for Fiscal Year 2008 holds overall discretionary spending for the U.S. Department of Education (ED) relatively flat. Notable proposed program increases, such as a near $1.2 billion increase in No Child Left Behind Act (NCLB) Title I funding, are offset by comparable program decreases and eliminations. Overall ED discretionary funding is proposed to be $56 billion in Fiscal Year 2008, an identical number to that proposed in Fiscal Year 2007, and 1% less than enacted for Fiscal Year 2006.

The most significant education policy change proposed in the President’s Budget is a series of substantial cuts in student loan bank subsidies and diversion of savings to Pell Grant program increases. The President’s student loan bank subsidy cuts total $18.8 billion over the next five years. It is the largest cut in student loan bank subsidies proposed in over 15 years. The President proposed similar, albeit lesser cumulative, cuts in his Fiscal Year 2006 budget. The Administration calls current subsidy levels "unnecessary" and "excessive."

We expect the President’s student loan subsidy cuts to be considered in the context of a pending Higher Education Act reauthorization bill and possible Budget Reconciliation Act. If the past is prologue, particularly under a Democratic led Congress, one can expect the Congressional Budget and Appropriations Committees to make an effort to match individual program increases while also staving off the extent of many program decreases and eliminations. Overall, therefore, one can expect final Fiscal Year 2008 overall ED discretionary funding to be at least slightly higher than Fiscal Year 2007 levels, although possibly markedly higher following Congressional-White House negotiations.

Note because of Congressional inaction on the Fiscal Year 2007 budget, all analysis in this memorandum compares the President’s Fiscal Year 2008 proposal against enacted Fiscal Year 2006 program levels unless otherwise noted. Below appears a detailed summary of the President’s Budget proposal for general education areas and key ED programs. Most useful may be the two-page chart summarizing past and proposed funding levels and included as an appendix.

No Child Left Behind Act Summary

The President’s Budget would provide $24.6 billion in funding for NCLB programs, the highest level of funding in NCLB’s history, but still $14.8 billion less than specifically authorized. Instead of a single NCLB authorization of appropriations, the law authorizes and subsequent legislation provides support for 78 associated funding streams. Cumulatively, funding for these programs has been authorized at $39.4 billion and "such sums" beyond that level as the Administration and Congress deem necessary in subsequent legislation. The Fiscal Year 2008 estimate of the President’s Budget support for NCLB reflects the sum of funding proposed for the relevant NCLB programs, plus additional new programs the President would amend NCLB to authorize.

Normally, a specific authorization of appropriations figure reflects only the maximum level at which Congress may fund a program. It is not mandatory for the federal government to meet authorization levels. It is also not mandatory for states, and accordingly their school districts, to participate in discretionary grant programs, such as NCLB. The law, therefore, cannot be deemed an "under-funded mandate" or "unfunded mandate." But because of its ubiquitous nature, it is a debatable question whether NCLB is a normal discretionary grant program.

Cumulatively, funding for the Elementary and Secondary Education Act (ESEA), as amended by NCLB, has increased by $27.5 billion since the law was first passed in January 2002. But cumulatively, NCLB also has received $70.9 billion less in funding than specifically authorized. Typically, commentators misleadingly note that funding for NCLB programs has increased by $6.2 billion since Fiscal Year 2001. In fact, that figure represents solely the difference between the Fiscal Year 2001 and Fiscal Year 2006 aggregate NCLB funding level. It ignores the concept of an inflation adjusted baseline. The value added by Members of Congress and the Administration to overall federal funding for NCLB programs since the law’s passage equals the increase in funding each year over the consistent level of ESEA program funding that presumably would have continued to be made each year had NCLB never passed. This concept of a baseline is used for all mandatory spending and tax programs, as per the Congressional Budget Act of 1974. It is not required for use with discretionary grant programs, but it is an applicable concept for assessing the federal education funding value added as a result of NCLB’s passage.

Almost two thirds, $17.6 billion, of the cumulative $27.5 billion increase in funding for ESEA, as amended by NCLB, stems from the initial political agreement in calendar year 2001 to increase federal education funding for school reforms contained in the new law. In no year after Fiscal Year 2002 has NCLB funding decreased below that the Fiscal Year 2002 level. In fact, in every subsequent year, NCLB funding increased above the immediate prior year’s level, albeit in increasingly smaller percentage increments. In effect, the initial NCLB funding agreement for Fiscal Year 2002 created a substantially heightened baseline for future year funding.

Key Elementary & Secondary Education Programs

Most K-12 programs in the President’s Budget are level funded, decreased, or eliminated. The President’s Budget proposes large decreases for specific programs, such as a $70 million decrease for the Teaching American History Program and a $245 million decrease for the Safe & Drug-Free Schools program. There is also a $100 million funding decrease for the NCLB Teacher Quality block grant program, and a $100 million increase for the Teacher Incentive Fund, reflecting a shift in the Administration’s emphasis from supporting credentialed teachers to supporting performance–based compensation systems. The President’s Budget proposes terminating 29 separate K-12 programs, including $272 million in education technology state grants, $99 million for the Even Start family literacy program, and $99 million in NCLB Title V general education block grants.

Title I Funding

• Title I Grants to LEA’s (+$1.2 billion)
• Title I School Improvement Grants (+$500 million)

The President’s Budget would increase funding for NCLB’s flagship main Title I program by $1.2 billion, but devote nearly all increased funding to high schools, which currently receive proportionately little NCLB support. Statutory authority would have to be altered to ensure proposed funds are used for high schools.

Approximately $12.7 billion in Fiscal Year 2006 Title I funding, roughly speaking, was dedicated to supporting NCLB performance and adequate yearly progress in Grades 3 through 8 and one high school grade ($12.7 billion for 7 years of accountability = $1.8 billion per grade). The proposed $1.2 billion increase, again roughly speaking, would be dedicated to supporting an additional three years of NCLB performance and adequate yearly progress in Grades 9 through 12 ($1.2 billion for 3 years of added accountability = $400 million per grade). In other words, the President’s Budget proposes heightened NCLB accountability, albeit with proportionately less funding.

For the first time, the President’s Budget also includes funding for a special NCLB grant program dedicated to assisting schools and districts identified as "in need of improvement" as per the statute. The proposed $500 million School Improvement Fund comes on top of a 4% set aside of main Title I funding for school improvement activities. In the President’s Budget, these two sources of funds would combine to supply $1.05 billion in school improvement funding for between 10,000 and 20,000 schools identified for improvement. Preliminary ED data indicates 10,214 schools were identified for the 2006-2007 school year, but nine states did not report data.

School Vouchers

• Promise Scholarships (+$250 million)
• Opportunity Scholarships (+$50 million)

The President’s Budget includes funding for several programs proposed, but not funded, in previous years. The proposed Promise and Opportunity Scholarships programs would provide low-income students in persistently low-performing schools with a voucher to attend private or out-of-district public schools, or for supplemental educational services from private providers. Proposed Promise Scholarships are a formula program to states while the Opportunity Scholarships are a competitive grant program to states, school districts, and public or private nonprofit organizations (including faith-based organizations).

The President’s Budget states that scholarship recipients would be required to take state assessments or a nationally-normed test as required under NCLB. That does not mean, however, that private schools attended with public funds will have to meet NCLB Title I accountability standards or publicly report data to inform parent decisions.

Funding Shifts for Teacher Programs

• Improving Teacher Quality State Grants (-$100 million)
• Teacher Incentive Fund (+$100 million)
• Adjunct Teacher Corps (+25 million)

In a relatively small degree, the President’s Budget shifts emphasis of past support for training highly qualified teachers to new support for performance-based teacher compensation systems and alternative certification. The President’s Budget cuts $100 million from the general teacher quality state block grant, a program that helps states work toward ensuring that all teachers are highly qualified as defined by state statutory requirements, but which may also be used to support performance-based compensation programs. In turn, it increases funding by $100 million for the Teacher Incentive Fund, a program designated to support performance-based teacher compensation. The President’s Budget also proposes $25 million for a new program, the Adjunct Teacher Corps, which would provide competitive grants to create opportunities for professionals with subject-matter expertise to teach secondary–school courses. Individuals do not need certification or licensure.

Programs Proposed for Elimination (Three notables of 29)

• Educational Technology State Grants (-$272.3 million)
• Even Start Family Literacy Training (-$99 million)
• NCLB Block Grant for Innovative Programs (-$99 million)

The President’s Budget proposes to terminate 29 K-12 programs totaling $1.1 billion above the 2007 level. (The same amount as the proposed increase for NCLB Title I grants to local school districts).

Most of the programs slated for elimination were also proposed for elimination last year. The NCLB Title V state block grant for Innovative Programs (-$99 million) is new to the list and was rated as "results not demonstrated" by the Office of Management and Budget’s Program Assessment Rating Tool (PART). Forty-eight programs had a PART rating of "results not demonstrated"; the Administration requested funding for 32 of those programs and recommended elimination of the other 16.

Higher Education Summary

The President’s Budget would increase the maximum Pell Grant to $4,600 next year and $200 beyond that each year over the next four years, paid for mostly by making a substantial reduction in the federal subsidies that banks and other lenders receive for providing Federal Family Education student loans. In making the proposal, the Administration has taken a different approach than House of Representatives over the question of how best to use savings derived from lender subsidies: by increasing the purchasing power of Pell Grants rather than cutting the interest rate on student loans in half. Note: Pending is a Senate Health, Education, Labor, and Pensions Committee proposal to increase both grant aid and cut student loan borrower interest rates.

The President’s Budget would eliminate most of the government’s other student aid programs that benefit low-income students. In fact, because the increase in the maximum Pell Grant is paid for through cuts to the student loan program rather than through additional spending, the amount of discretionary spending the government spends on federal student aid would actually decline in Fiscal Year 2008 under the President’s Budget.

Addressing Rising College Costs

• Pell Grants (+$177.8 million discretionary, +$2.2 billion mandatory)
• Academic Competitiveness Grants (+$1.2 billion mandatory)

Pell Grants: The President’s Budget proposes raising the maximum Pell Grant by $550 over the Fiscal Year 2006 level to $4,600, the largest one-year jump in the maximum award in over 30 years. (Note: The recently enacted Fiscal Year 2007 Continuing Resolution increased the maximum Pell Grant to $4,310) The President’s Budget for Fiscal Year 2008 proposes to increase the maximum grant to $5,400 by 2012, with annual increases of $200 each year beginning in Fiscal Year 2009. For 2008, the plan calls on Congressional appropriators to provide $177.8-million in additional discretionary dollars to keep a baseline award of $4,050, the same level as in 2007 fiscal year; and for Congress to finance the $550 increase in the maximum grant through savings generated by cutting $2.2-billion from lender subsidies. The Administration proposes cutting an additional $18.8 billion from the subsidies to lenders and student loan guarantee agencies over the next five years to achieve the $5,400 maximum award.

According to the College Board, the maximum Pell Grant, which has remained at $4,050 between Fiscal Years 2002-2006, currently covers only 33 percent of the average cost of attendance at a public four-year college, down from 42 percent in school year 2001-02. The President’s Budget would reverse that trend. However, the proposal would come to fruition only if Congress includes such changes in legislation to renew the Higher Education Act or in a Budget Reconciliation bill and passes either of those measures this year. Otherwise, the maximum grant would remain at the Fiscal Year 2006 level under the President’s plan.

Academic Competitiveness Grants: The President’s Budget proposes increasing by 50% new Academic Competitiveness Grants (ACG) that go to Pell Grant recipients in their first two years of college who graduate from rigorous high-school programs. ACG grants for freshmen would rise to $1,125 from $750, and those for sophomores would grow to $1,950 from $1,300. The cost of making these increases is projected to be $260-million in Fiscal Year 2008 and $1 billion between Fiscal Years 2008 and 2012, all of which would be paid for through cuts to lender subsidies.

The ACG program is intended to improve the academic preparation of low-income students by encouraging them to enroll in rigorous high-school programs. The program, however, is so new – students just started receiving the grants this past fall – that it is too early to determine whether it is achieving its aims.

Programs Proposed for Elimination

• Supplemental Educational Opportunity Grants (-$770.9 million)
• Perkins Loan Forgiveness (-$65.5 million)
• Leveraging Educational Assistance Partnerships (-$65 million)

The President’s Budget proposes to eliminate several major federal student aid programs, including perennial targets, such as the Leveraging Educational Assistance Partnership (LEAP) Program, which matches each dollar that states commit to need-based aid, and the Perkins Loan Program, which provides low-interest loans primarily to the neediest students. For the third year in a row, the Administration also proposes to recall the federal share of money that colleges hold in their revolving Perkins Loan funds. The Administration, for the first time, however, proposes to eliminate the Supplemental Educational Opportunity Grant (S-E-O-G) program, which augments Pell Grants for low-income students. Unlike Pell Grants, which are awarded directly to students, Perkins Loans and SEOG funds are distributed to colleges, which add their own dollars to the program, and then provide the funds to students.

LEAP: Congress created the LEAP Program (which was originally called the State Student Incentive Grant Program) in 1972 to encourage states to provide need-based student aid. At the time, only 26 states had such programs. Today, the states award nearly $5 billion a year in need-based aid, and most states significantly exceed the statutory matching requirements. But some states, such as Alabama, Georgia, and Wyoming, do not and there is a concern that if the program is eliminated, these states and others might lessen their commitment to helping the most financially-needy students.

Perkins Loans: In addition to the Stafford Loans for undergraduate and graduate students and the PLUS loan program for the parents of undergraduate students and independent graduate students (both delivered through lenders and the government directly), the Education Department supports a third type of loan – campus based Perkins Loans. The oldest and smallest of the three loan programs, Perkins loans carry a fixed 5 percent annual interest rate and reflect a mix of institutional matching funds and original federal resources that have revolved in a pool for over 35 years. The formula that the government uses to distribute Perkins Loan pool funds essentially guarantees colleges the same share of funds they have received from the program since the 1970s. The bulk of new money that lawmakers appropriate each year goes to the private colleges and public flagship universities that have been in the program for decades, leaving little new money for community colleges and state colleges that now enroll greater proportions of low-income students. The program, which provides generous loan-forgiveness incentives to students who choose to become teachers in schools that predominantly serve low-income students, is considered duplicative by the Administration of its larger sibling, the Stafford Loan program.

S-E-O-G: SEOG grants supplement Pell Grants (formerly known as Basic Educational Opportunity Grants). As with Perkins Loans, the federal contribution to SEOG needs to be matched by colleges, so the program leverages institutional aid. But the formula the government uses to distribute SEOG funds is similar to the one used to allocate Perkins Loans. As a result, two-thirds of the money that Congress appropriates each year goes to institutions that have been in the programs for decades. On the other hand, more than 70 percent of students who receive SEOG have family incomes of less than $30,000 and 90 percent of those receiving an SEOG are also Pell Grant recipients. As with the Perkins Loan program, SEOG is considered duplicative by the Administration to its larger sibling, the Pell Grant program.

Finding Savings from Student Loans

• Subsidies to Lenders (-$14.9 billion over five years)
• Subsidies to Guarantee Agencies (-$3.9 billion over five years)

Loan Limits: The President’s Budget proposes to increase by $2,000, to $7,500, the annual borrowing limits in the subsidized Stafford loan program for juniors and seniors; and proposes raising the aggregate limits by $7,500, to $30,500. This proposal is expected to cost $1.1 billion over five years. Congress has not raised the borrowing limits for juniors and seniors since 1992, even though college prices have increased markedly since then. As a result, growing numbers of borrowers are taking out private student loans, which have substantially less favorable terms and conditions than federal loans.

Plus Loan Interest Rates: The President’s Budget calls on Congress to raise the interest rate on PLUS loans offered through the Direct Loan delivery system from 7.9 percent per year to 8.3% instead. Related, the President’s Budget calls on Congress to decrease the interest rate on PLUS loans offered through the competing bank-operated Federal Family Loan delivery system from 8.5 percent per year to 8.3 percent. Last year, Congress inadvertently raised the interest rate on PLUS loans only for students borrowing through the bank-operated Federal Family Loan delivery system.

Lender Subsidy Cuts: The President’s Budget proposes a series of Federal Family Loan delivery system lender subsidy cuts, including:

• Reducing the interest subsidies lenders receive from the government by half of one percentage point, or 50 basis points. The proposal is expected to save $12.4 billion over five years. The government intentionally provides student loan bank subsidies that are higher than needed to ensure continued lender participation in the program and the continued availability of loans to all students eligible for them. The decision to cut the interest subsidy by 50 basis points is largely arbitrary as the government doesn’t have any proven tool for determining the optimal subsidy rate. Lenders say they are likely to pass the costs onto students by eliminating some of the borrower benefits they offer. But many of these rebates are contingent on students making between 24 and 48 payments on-time, and, as a result, few students qualify for them. Less than 5% of all eligible students actually receive proffered on-time payment benefits.
• Lowering the percentage of principal borrowed that the government reimburses lenders for loans that go into default, from 97 cents to 95 cents of every dollar that is unpaid. This proposal is expected to save $1.6 billion over the next five years. Having lenders take on more risk may serve as more of an incentive for them to prevent borrowers from going into default.
• Double the fees that lenders pay the government when issuing consolidation loans, to 1 percent of the loan balance, from ½ of one percent. Consolidation loans tend to have higher balances and present fewer risks to lenders and, as a result, are more profitable to loan providers than other federal student loans.

Guarantor Subsidy Cuts:

• Reducing to 16% from 23% the amount guarantee agencies can keep for themselves from the money they recover from borrowers who default. The proposal is expected to save $2.3 billion over the next five years. The Education Department pays its Direct Loan contractors on average 16 cents for each dollar they collect on defaulted loans. Reducing the rate may provide guarantors more incentive to prevent borrowers from going into default.
• Changing the way the government pays guarantee agencies. Currently, the agencies are paid an administrative fee based on the original principal amount of active loans they have guaranteed. The President’s Budget proposes to shift the basis for this fee to a unit-cost payment tied to the number of accounts each agency manages. The proposal is expected to save $1.6 billion over five years. The government currently uses 35 state and private nonprofit guarantee agencies, which reinsure lenders against default, and then are reimbursed themselves. Because the government reimburses guarantee agencies completely for defaulted loans, questions have been raised about whether the entities are needed anymore.

Special Education and Early Education Summary

After significant increases during President Bush’s first term, special education funding has leveled off significantly in his second term. The President’s Budget continues that trend, proposing a modest decrease in funding for the IDEA Part B grants to states program. Early education efforts of the Bush Administration have been focused largely on the Reading First and Early Reading First programs, while Head Start has received small funding increases or level funding.

Cuts to IDEA State Grants

• IDEA (main program) Part B Grants to States (-$92 million)
• IDEA Preschool Grants (level-funded)
• IDEA Grants for Infants and Families (-$13 million)

The President’s Budget for IDEA Part B grants to states at $10.5 billion reflects a $92 million decrease from the FY 2006 appropriation. According to the Administration, this lesser amount will serve 41,000 more children in Fiscal Year 2008 than Fiscal Year 2006. In other words, federal support per special education child will drop from $1,553 in Fiscal Year 2006 to $1,528 in Fiscal Year 2008. As enrollment of children with disabilities grows and costs increase with inflation, declining federal support translates into local taxpayers shouldering an increased share of the mandatory costs of educating children with disabilities. Even though IDEA Part B was rated "adequate" by a PART assessment in 2005, it has been subject to cuts since Fiscal Year 2004.

Comparable Funding for Early Education

• Head Start (+$7 million)
• Reading First (-$10.5 million)
• Early Reading First (+$15 million)

Head Start: The President’s Budget for Head Start is essentially level funded with the Fiscal Year 2006 appropriation, increasing slightly from $6.782 billion to $6.789 billion. The Administration uses the results of the controversial National Reporting System (NRS) to give the program a PART rating of "moderately effective." NRS assessments test children participating in Head Start in order to measure their yearly progress, and NRS data has documented a decrease in the socio-economic school readiness gap. Criticism of the NRS focuses on the validity and utility of the assessment measures. This is the first year that a PART rating for Head Start has been demonstrated.

Reading First: The President’s Budget provides Reading First funding equivalent to its Fiscal Year 2006 level. There has been debate about whether Reading First grants are supporting evidence-based best practices in reading instruction, or whether grant reviewers have been biased towards particular teaching methodologies. According to the Administration, however, the effectiveness of the program is not in question. Despite negative implementation reports out of the Education Department’s Inspector General’s office, the program received an "effective" PART rating in 2006, based on performance data.

Math and Science Summary

Department of Education: The President’s Budget supports his American Competitiveness Initiative, despite Congress’s failure to fund several proposed programs last year. Most of the requested increases for math and science are directed to the President’s proposed elementary and secondary programs, with math and science higher education grants growing slightly. The President’s budget would funnel significant additional resources to high schools for national Advanced Placement (AP) test participation, consistent with his new emphasis on improving high school standards.

National Science Foundation: At the National Science Foundation (NSF), the President’s Budget for the Directorate for Education and Human Resources is $750.6 million, an increase of 7.2% from the Fiscal Year 2006 appropriation. Programs receiving increased funding focus on improving higher education coursework and expanding undergraduate participation in science, technology, engineering, and math fields. There is less emphasis on K-12 teacher training and professional development. Overall funding for NSF’s Math and Science Partnerships would decrease by 27%.

American Competitiveness Programs as "Proven Models"

• Math Now (+$250 million)
• Advanced Placement (+$90 million)
• SMART Grants (+$40 million, 13,000 grants)

The President’s proposed Math Now program, the mirror image of Reading First, and Expanding the AP Incentive Program stress implementing standards backed by research. According to the Administration, the AP is a "proven model" that has produced data-driven results, and a PART analysis gave it a "moderately effective" rating. Congress funded Advanced Placement at $32.2 million in Fiscal Year 2006, but has yet to fund Math Now.

Math and Science Partnerships

• Department of Education (-$.1 million)
• National Science Foundation (-$17.2 million)

Both the Department of Education and the NSF fund Math and Science Partnerships (MSPs), proposed at $182.1 million and $46 million respectively for Fiscal Year 2008. The two programs emphasize different types of projects, but there is the possibility for overlap. The Department and NSF say that they are looking for ways to collaborate and minimize conflict. The Department’s program awards competitive grants to projects that foster interactions between professors and current teachers. The Administration has argued that these MSPs are better suited to produce results in the classroom. NSF partnerships concentrate more on research for improving teaching methods. In recent years, Congress has cut spending for the NSF program and greatly increased funding for the Department’s program, which started at only $12.5 million in Fiscal Year 2002. However, data on program effectiveness for the Department’s MSPs is still being collected, while the NSF recently released its first impact study. The study includes data that shows marked improvements in mathematics and science proficiency for participating students.