On Friday, March 1, President Obama signed an order to implement sequestration, an across-the-board cutting mechanism designed to achieve nearly $1 trillion in deficit reduction over the next 10 years. While many specific details remain unknown, the Department of Education (ED) has released initial guidance on sequestration as it relates to cuts facing the campus-based, TEACH, and loan programs. NASFAA has summarized this information below and will update this document as new information is received.
What is sequestration?
Sequestration is an across-the-board cutting mechanism that will impact most federal government programs. It is designed specifically as a deficit reduction measure and is scheduled to occur over 10 years, in order to achieve roughly $1 trillion in cuts during that time. Sequestration is the result of the Super Committee’s failure to reach agreement on a deficit reduction deal in 2011. Sequestration went into effect Friday, March 1 and is scheduled to impose additional cuts over the next 10 years.
How does it impact the Federal Student Aid Programs?
The Office of Management and Budget (OMB) has announced that sequestration will cut overall ED funding by $2.278 billion. For federal student aid, the Federal Supplemental Educational Opportunity Grant (FSEOG), Federal Work Study (FWS), TEACH Grant, TRIO, Gaining Early Awareness and Readiness for Undergraduate Programs (GEAR UP), and Graduate Assistance in Areas of National Need (GANN) will each see an estimated 5.0 percent cut during the first year of sequestration.
Stafford Loan origination fees are expected to rise from 1.00 to 1.05 percent and PLUS origination fees to rise from 4.00 to 4.20 percent. Annual or aggregate loan limits would not be impacted.
The Pell Grant is protected from sequestration for the first year. In years 2-10, (Award Years 2014-15 though AY 2022-23) Pell will be subject to cuts as a result of sequestration.
The specific long-term impact on Department of Education (ED) contractors is unknown.
Which award year will the cuts impact?
Cuts to FSEOG and FWS will not occur until the 2013-14 award year. The Electronic Announcement (EA) issued March 1, indicates that sequestration would immediately impact loan origination fees, and might possibly impact the TEACH Grant now, during the current 2012-13 award year.
Regarding origination fees, the EA stated that fee increases would take effect if the first disbursement of the loan is after the sequester takes effect (March 1). It is NASFAA’s understanding that ED is currently working on the necessary processes for implementing the higher fees and will send notices to students and parents whose first disbursement is after the date sequestration takes effect to inform them of the increase.
It is unclear how this will be implemented in COD or in schools’ financial aid management systems. Currently, ED advises that schools “should continue their normal procedures for awarding and disbursing Direct Loans and for submitting Direct Loan records to the Department’s Common Origination and Disbursement (COD) system.”
Less clear is what will happen to TEACH Grants. The TEACH Grant makes for a unique circumstance under the sequester, given that it operates both like a grant and a loan. While the EA indicates that the TEACH Grant will be subject to cuts under sequestration, the exact manner of those cuts has not been revealed. The EA states that any reduction in the amount of a TEACH Grant would apply to awards where the first disbursement was made during the time the sequester is in effect (March 1) and recommends that schools not make a first disbursement of any TEACH Grants until further information is available.
When will I know how much was cut for the student aid programs at my campus?
Hopefully soon, but it could take several weeks to find out what the new campus-based allocations under sequestration will be for your campus-based programs. Using ED's institutional-level formula elements for the 2013-14 tentative campus-based allocations, NASFAA has created a list of estimated campus-based reductions on an institutional basis for both the FWS and FSEOG programs as a result of the impending sequester.
What should I tell my students?
For schools preparing award letters for the 2013-14 award year, we advise that award letter language include clear caveats that award amounts for FWS, FSEOG, TEACH, and loan origination fees are subject to change based on federal funding.
Will Congress act to stop sequestration?
Congress does have the power, at any time, to stop sequestration (even if it’s already gone into effect), so it is likely that negotiations over the cuts will continue. NASFAA is currently trying to obtain information as to how scheduled cuts would be impacted if sequestration were to be halted before the cut is supposed to occur (e.g., if sequestration were stopped in May, would FWS and SEOG still see cuts beginning in July?). As has become customary in DC, these talks are ongoing and very fluid.
If everyone knew sequestration was coming, why don’t we have more information?
The sequester was created in such a way so as to be so terrible, that Congress and the Administration would be forced to come together to avert such drastic cuts. Now that it has actually occurred, federal agencies are left scrambling to determine how these cuts will actually be implemented. These cuts are unprecedented in terms of scope and magnitude, and we have no past precedents or blueprints to rely on. NASFAA will continue to provide information as it becomes available from ED, the Office of Management and Budget, and Congress.
Publication Date: 3/4/2013