Could the Pell Grant Crisis Harm Low-Income Students?

Early in 2025, the Pell Grant program faced a sudden budget shortfall that threatened funding for millions of low-income college students. But after a last-minute $10.5 billion Congressional rescue the following July 4, advocates celebrated—yet they also continued to warn that the program’s long-term financing deficiencies remain unresolved.

To understand how this alarming shortfall developed—and why it could happen again as soon as the 2026-2027 academic year—it helps to look at the factors that contributed to this unexpected crisis.

With a $7,395 maximum annual award, the Pell program is the cornerstone of America’s federal financial aid program for undergraduates and the most important college funding source for 30 percent of students from our nation’s lowest-income families. But January 2025 data from the Congressional Budget Office (CBO) showed that the program faced an unexpected $3 billion deficit only six months after it had reported a healthy budget surplus.

College financial aid officers who support students from low-income families were concerned in 2024, but not about the Pell program’s finances. Instead, they worried that the troubled rollout of the new FAFSA system would result in lower financial aid awards for fewer students. In mid-2024, the CBO had predicted a sharp drop in undergraduate enrollments and fewer financial aid applications through the FAFSA system from those students who did enroll.

Surprisingly enough, the opposite result took place. Because of a significant error that counted dual-enrollment high school students as full-time college students, 2024 enrollments actually climbed by five percent after the U.S. Department of Education had adjusted those tallies. That meant many more low-income students were applying for Pell Grants than policymakers had anticipated—and all those awards had unexpectedly depleted the program’s budget during fiscal year 2025.

Sudden funding gaps like this one can lead to reduced availability and lower dollar awards for millions of students, which can jeopardize their chances of earning their college degrees. That’s also what happened after the Great Recession, when Congress faced a huge gap between the mandated Pell appropriations and the discretionary funding required to completely cover the program’s costs.

The reason this scenario occurs repeatedly is that the Pell program operates within a unique hybrid funding structure in Washington. Because the press seldom explains how this funding arrangement works, few grant applicants or their families actually understand this system.

Because every eligible college student across America has a legal right to receive a Pell Grant, the program functions like an entitlement program, similar to Medicare or Social Security. But unlike most federal entitlement programs, Pell doesn’t exclusively depend on funding mandated by statutes.

Although a portion of the Pell budget automatically comes from funding required within the authorizing legislation, the source of most Pell funding is actually discretionary funding appropriated by Congress each year. For example, during the 2024 fiscal year, only about $1,000 or 14 percent of the $7,395 maximum award actually came from mandatory funding; the $6,395 balance, or about 86 percent, came from discretionary funding.

The problem is that Congress must appropriate these discretionary funds several months in advance of the start of each fiscal year. That means lawmakers have to base their decisions on projections by the Congressional Budget Office of how much the Pell program is likely to cost during the upcoming 12 months. However, those estimates might not be accurate—just like the overly-optimistic estimates the CBO issued during the summer of 2024.

Under this system, each year, differences exist between the program’s projected costs and the available funding. According to the Institute for College Access and Success, “This creates significant complications for policymakers and ongoing risks for the students who rely on the grant.”

ICAS reports that advance Pell appropriations based on projections will typically result in four potential scenarios:

• Current Funding Gap: Policymakers didn’t provide enough discretionary funding in the previous year, probably because of an unexpected increase in the Pell program’s costs.
• Current Surplus: The Pell program has more funding than necessary to cover its costs for the fiscal year.
• Projected Shortfall: Projections of the Pell program’s future costs predict that the program will not have enough funding in future fiscal years.
• Projected Surplus: Projections indicate the program will have more funding than it needs to cover costs in future years; this balance is known as the “Pell Reserve.”

Now, in surplus years, funds will remain within the program to cover increased program costs. However, policymakers have wide latitude over how these funds are spent—even over budget dollars earmarked to support the Pell program. Policymakers could use the funds to increase the award amount or expand eligibility—or they could even shift the surplus to fund other federal programs.

But in gap and shortfall years like 2025, policymakers need to locate and appropriate additional discretionary funds that will cover the projected costs that keep the program operating. And in the worst-case scenarios, they’ll have to cut the Pell costs by either decreasing the grant amount or curtailing eligibility. Those steps put America’s most vulnerable students at risk of not graduating, and millions of students have suffered both immediate and long-term harm when these situations developed.

For example, two factors after the Great Recession produced a Pell funding gap from 2010 to 2012 that harmed many low-income students. First, as the economy slowed, more students became Pell-eligible because their families had lost their jobs and income because of the recession, depleting the program’s previously appropriated funding. And second, because of the inverse relationship between postsecondary enrollment and economic conditions, enrollments at most colleges soared as laid-off workers sought to upskill.

Because of these two factors that drove up the number of Pell-eligible college students, the Pell program’s costs skyrocketed well beyond the pre-recession levels that policymakers had anticipated. These costs resulted in both current and projected deficits—a current funding gap as well as a projected shortfall during future years.

Congress closed the immediate gap in fiscal years 2011 and 2012 by cutting the Pell program by more than $50 billion during the decade ending in 2022. Few of those cuts were ever restored.

Those cuts shut off “year-round” Pell Grant funding for summer sessions, which was later restored in 2017. But Congress also reduced the lifetime Pell eligibility limit from 18 semesters to 12 semesters—and that reduction meant that millions of students lost eligibility.

These semester limits especially affected older undergraduates who depend on Pell grants to fund their education over more semesters than traditional-age undergrads who typically attend college full-time; these older students were usually attending online and in-person classes part-time while they were also working. The cuts also affected undergraduates who needed additional semesters to graduate, such as students in accounting and electrical engineering programs whose loaded curricula typically require at least 10 semesters instead of the usual eight.

Could cuts like these after the Great Recession happen again? Yes, they could. There’s no reason why another “perfect storm” of adverse factors can’t deplete the program of funds, as happened 15 years ago.

But such cuts don’t necessarily have to occur—so long as Congress acts swiftly to shore up the Pell program’s funding as it did only days ago. Here’s the critical language in the 2025 reconciliation bill signed into law by the president on July 4:

Subtitle D—Pell Grants

SEC. 83003. PELL SHORTFALL.

Section 401(b)(7)(A)(iii) of the Higher Education Act of 1965 (20 U.S.C. 1070a(b)(7)(A)(iii)) is amended by striking ‘‘$2,170,000,000’’ and inserting ‘‘$12,670,000,000’’.

It looks like the stroke of a pen, doesn’t it? But it’s really not. Keep in mind that thousands of hours of analysis, lobbying, and negotiations in both the House of Representatives and the Senate lie behind that $10.5 billion increase. And just to keep the Pell program functioning, Congress needs to engage in this lengthy and protracted legislative process every year.

Unfortunately, the only way to eliminate all the uncertainty surrounding annual projections and budget cuts would be to allocate mandatory funding to Pell Grants through new statutes. The most recent attempt to do that took place with S.4595, the Pell Grant Preservation and Expansion Act of 2024, which died in the Senate Health, Education, Labor, and Pensions committee before the November election. Had the measure passed, it would have obviated the need for annual appropriations by adjusting the Pell program’s funding automatically according to student participation levels.

The July 4 funding boost averts an immediate Pell Grant crisis, ensuring students will receive the financial aid they depend upon for the coming year. Nevertheless, this discretionary solution only remains a temporary patch.

Without urgent legislative reform driven by politically active students and families that will eliminate Pell’s dependence on annual discretionary appropriations, college students from low-income families will face continued uncertainty indefinitely. For Pell Grants to serve as a reliable financial aid lifeline, the only solution is for Congress to act decisively by enacting a new Pell statute that will permanently ensure that funding will remain predictable and secure in the long term.