oversight

Pell Grants: How the Department of Education Estimates Program Costs

Published by the Government Accountability Office on 1990-02-21.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

United States
General Accounting Office
Washington, DC. 20648

Human Resources    Division

B-236667

February 21,199O

The Honorable Tom Harkin
Chairman, Subcommittee on
  Labor, Health and Human Services,
  and Education
Committee on Appropriations
United States Senate

Dear Mr. Chairman:

This report responds to your August 11, 1989, request for information
on the Pell grant program. This program is administered by the Depart-
ment of Education and provides grants to financially needy students
pursuing a postsecondary education.

You requested that we describe the Department’s process for estimating
Pell grant program costs, and determine what factors caused or contrib-
uted to the Department revising its fiscal year 1990 budget request. You
were particularly concerned about the Department’s latest estimate,
which was $696 million higher than its initial request for fiscal year
1990. In addition, you asked us to determine whether the Department
has authority to borrow funds from subsequent years’ appropriations to
pay for Pell grant funding shortfalls from previous years.

On January 16,1990, we briefed your staff on the results of our analy-
sis. We reported that underestimating the number of recipients was the
primary cause of the increase in the Department’s request. This briefing
report summarizes the information presented at that meeting (see
am. I>-


Pell grants are available to students meeting certain eligibility criteria,
with the amount of aid determined by their financial need, educational
costs, and whether they attend school full or part time. Students are
eligible for grants for up to 6 years of study, and they must reapply
each year. The number and amount of Pell grants available to students
are limited by the total funds the Congress annually appropriates and
the number of applicants who are eligible to receive the grants.

The Pell grant program is funded so that appropriations for one year
fund the program for the subsequent year. For example, the fiscal year
1990 appropriations will be used to disburse PeIl grants to students



Page 1                         GAO/HI&D90-73BR   Estimating   Pell Grant Program   Costs
                        B-236667




                        attending school during the 1990-91 award year. An award year covers
                        the period beginning July 1 and ending on the subsequent June 30.

                        Since the program’s inception in 1972, the number of recipients has
                        increased from 176,000 to 3.2 million in fiscal year 1988, while funding
                        has increased from $122 million during that first year to $4.3 billion in
                        1988. In award year 1988-89, the program awarded grants ranging from
                        $200 to $2,200, with an average award of $1,397.


                        To determine how the Department estimates Pell grant costs and what
Scope and               factors affect these costs we (1) interviewed key personnel responsible
Methodology             for developing the Department’s Pell grant budget estimates and (2)
                        determined what methods and factors the Department used to develop
                        the estimates. We analyzed the Department’s budget requests and asked
                        Department officials to explain why they estimated additional costs of
                        $696 million for fiscal year 1990.

                        We interviewed officials of the Congressional Budget Office and the
                        American Council on Education (ACE), organizations that also periodi-
                        cally estimate Pell grant program costs, to obtain their views on the
                        Department’s budget formulation process. We also interviewed Office of
                        Management and Budget officials who provide economic indicators, such
                        as family income and the consumer price index, to federal agencies for
                        use in developing their budget requests and review the Department’s
                        budget estimates on behalf of the administration.

                        Further, we asked the Department for its opinion on what legal basis or
                        legislative authority it has to borrow against future years’ appropria-
                        tions. We evaluated their response and issued our report to you on Janu-
                        ary 26, 1990.


                        The Department uses a three-step process to develop its Pell grant
How the Department      budget estimate: a computer cost model, a series of adjustments to
of Education Develops   reflect program changes that the model does not include, and budgetary
Its Budget Estimates    adjustments. For the 1990 budget request, the model used over 30 eco-
                        nomic indicators. It also used data such as income, dependency, and cost
                        of education, from a sample of about 151,000 students who applied for
                        and may have received Pell grants during the 1986-87 award year. This
                        was the latest program data available at the time the Department built
                        its estimate.



                        Page 2                       GAO/HRD-90-73BR   Estimating   Pell Grant Program   Costa
                           B-236667




                           After the Department uses the model to develop the first-step estimate,
                           it manually adjusts the model’s estimate to reflect recent program
                           changes that the model is unable to simulate. For example, in developing
                           its fiscal year 1990 budget request, the Department made three program
                           adjustments to the model’s estimate to account for program changes
                           made by the Higher Education Amendments of 1986 (Public Law 99-
                           49&), which (1) expands the definition of an independent student (gener-
                           ally a person responsible for his or her own financial support), (2) pro-
                           vides school financial aid administrators’ discretion in adjusting a
                           student’s cost of attending school and the amount of funds a student’s
                           family could be expected to contribute to his or her education, and (3)
                           makes students attending school less than half-time eligible for Pell
                           grants.

                           The Department uses a third step to adjust its estimate for possible pro-
                           gram funding shortages and surpluses+ The resulting amount becomes
                           the Department’s request to the Congress. For example, the initial 1990
                           budget request included an additional $96 million to adjust for the esti-
                           mated difference between funding and program courtsfor fiscal years’
                           1988 and 1989. This step also includes adjustments made to reflect esti-
                           mated savings from the Department’s legislative proposals. (Appendix II
                           describes the Department’s process for estimating Pcll grant program
                           costs in more detail.)


Cost Model Estimate        Historically, the Department’s cost model estimate has been a reasona-
Closely Predicted Actual   bly accurate predictor of program costs, From award years 1980-81
                           through 1988-89, the model’s estimates were within an average of 3.63
Program Costs              percent of actual costs. Department officials said that if the award year
                            1983-84 were not included in this analysis-when    there was a slight
                           recession which they could not predict-the    average difference between
                           the cost model estimate and actual costs would have only been 2.25 per-
                           cent. (See fig. 1.)

                           However, in each of those years the Department reduced the model’s
                           estimate by making program and budgetary ad.justments. These adjust-,
                           ments generally resulted in a budget request being submitted to the Con-
                           gress that underestimated that year’s actual costs. Department officials
                           said that a major reason for reducing the cost model estimate during
                           these years was to reflect estimated program savings. The Department
                           expected to achieve t.hese savings from legislative proposals it submit-
                           ted as part of its annual budget requests.



                           Page 3                       GAO/HRD-90-73BR   Estimating   Pell Grant Program Costs
                                     B-236667




Figure 1: Final Budget Requests
Generally Less Than Actual Program
                                     6.0      Dollars     In Billions
costs
                                     5.6
                                     5.2
                                     4.6
                                     4.4
                                     4*0
                                     3.6
                                     32
                                     2.6
                                     2.4
                                     2.0
                                     1.6
                                     1.2
                                     0.8
                                     0.4
                                       0




                                           Award   Year

                                              -             Cost model estimate
                                              I - - -       Actual program cost
                                              m             Final budget request



                                     Appendix III lists the dollar values shown in the above chart.


                                     The Department’s second budget request for fiscal year 1990 (submitted
What Caused the $696                 in June 1989) was actually $522 million more than its first request (sub-
Million Increase?                    mitted in January 1989). The Department estimated it would need an
                                     additional $696 million to operate the program under existing legisla-
                                     tion. However, it requested $174 million less than this estimate in antici-
                                     pation of savings expected to accrue from legislative changes the
                                     Department was proposing.

                                     The $522 million net increase was attributed to (1) an increased cost
                                     model estimate of $560.7 million based on revised economic indicators
                                     and an unexpected increase of 500,000 grant recipients, (2) an addi-
                                     tional budgetary shortage of $60.7 million and (3) a decrease of $99.4
                                     million in program adjustments, largely due to a lower estimated cost for




                                     Page 4                                        GAO/HRD90-73BR   Estimating   Pell Grant Program   Costs
                                          B236667




                                          financial aid administrators’ discretion. Table 1 compares the Depart-
                                          ment’s initial and most recent fiscal year 1990 Pell grant budget
                                          requests.

Table 1: Comparison of the Department’s
Fiscal Year 1990 Pell Grant Budget        Dollars In millions                                                  ._,...-.
Requests                                                                January 1989             June 1989
                                                                              request               request                Change
                                          Cost model                          $4,274.5              $4,835.2               +$560 7
                                          Program adjustments                    369.7                 270.3          .-      -99.4
                                          Budget adjustments                      95.8                 156.5                 + 60.7
                                          Final budaet reauest                $4,740.0              $5,262.0               +$522.d


                                          Appendix IV contains more information on the comparison of the
                                          Department’s fiscal year 1990 budget estimates.

                                          The Department attributed the increased number of students who were
                                          expected to receive Pell grants to (1) amendments to the Higher Educa-
                                          tion Act requiring all students to apply for a Pell grant, whether or not
                                          they are eligible before they can receive other federal aid, such as a
                                          Stafford student loan, and (2) an increase in the number of students
                                          applying for and receiving Pell grants. The Department also estimated
                                          that independent students--who generally receive larger grants than
                                          dependent students-increased      by 9 percent from the preceding award
                                          year, and many of them will probably qualify for Pell grants.




                                          Page 6                        GAO/HRD9@73BR    Estimating   Pell Grant Program     Costs
-
    B-236667




    As agreed with your office, we did not obtain written comments from
    the Department of Education. We did, however, discuss its contents with
    Department program officials and incorporated their comments where
    appropriate.

    We are sending copies of this report to other congressional committees,
    the Department of Education, the Office of Management and Budget, the
    Congressional Budget Office, the American Council on Education, and
    other interested parties.

    If you have questions about the information presented, please call me on
    (202) 275-1793. Other major contributors to this report are listed in
    appendix V.

    Sincerely yours,




    Franklin Frazier
    Director, Education
      and Employment Issues




    Page 6                      GAO/HRD-90-73BR   Estimating   PelI Grant Program Costs
Page 7   GAO/HRD-90-73BR   Estimating   Fell Grant Program   Costs
Contents


Letter                                                                                                          1

Appendix I                                                                                                 12
Pell Grants: How the
Department of
Education Estimates
Program Costs
Appendix II                                                                                                33
Department of            How the Computer Model Works                                                      33
                         Program Adjustments                                                               34
Education’s Process      Budgetary Adjustments                                                             35
for Estimating Pell
Grant Program Costs
Appendix III                                                                                               36
Table Supporting
Figures in Report Text
Appendix IV                                                                                                37
Department of            January 1989 Estimate                                                             37
Education’s Fiscal       February 1989 Estimate                                                            38
                         April 1989 Estimate                                                               38
Year 1990 Pell Grant     June 1989 Estimate                                                                38
Program Budget           Comparison of January and June Budget Requests                                    39
Request
Appendix V                                                                                                 41
Major Contributors to
This Briefing Report
Related GAO Products                                                                                      44

Tables                   Table 1: Comparison of the Department’s Fiscal Year                                5
                              1990 Pell Grant Budget Requests


                         Page 8                      GAO/HRD-SW73BR   Estimating   Pelt Grant Program   Costs
          Contents




          Table III. 1: Comparison of Pell Grant Cost Model                                 36
              Estimates, Actual Program Costs, and Final Budget
              Requests: Award Years 1980-81 to 1988-89
          Table IV.1: Comparison of Education’s Fiscal Year 1990                            37
               Pell Grant Budget Estimates
          Table IV.2: Comparison of Award Year 1990 Pell Grant                              39
              Applicants and Recipients in the Department’s
              January and June 1989 Budget Requests
          Table IV.3: Major Cost Components for the January and                             40
               June 1989 Pell Grant Budget Requests

Figures   Figure 1: Final Budget Requests Generally Less Than                                 4
               Actual Program Costs
          Figure I. 1: Pell Grants                                                          12
          Figure I. 2: Background                                                           13
          Figure 1.3: Timeframes for FY 1990 Pell Grant Program                             14
               Budget Request
          Figure 1.4: Objectives                                                             15
          Figure 1.5: Scope                                                                  16
          Figure 1.6: Methodology                                                            17
          Figure 1.7: What Did We Find?                                                      18
          Figure 1.8: Department Uses Three-Step Process for                                 19
               Budget Request
          Figure 1.9: How Does the Cost Model Work (FY 1990)?                               20
          Figure 1.10: Model Estimates, Budget Requests, and                                21
               Actual Costs
          Figure I. 11: Program Adjustments in FY 1990 Budget                               22
               Estimate
          Figure 1.12: Budgetary Adjustments in FY 1990 Budget                              23
               Estimate
          Figure 1.13: Major Milestones in FY 1990 Pell Grant                               24
               Budget Estimates
          Figure 1.14: FY 1990 Budget Process Was Atypical                                  25
          Figure 1.15: What Happened to FY 1990 Budget Estimates?                           26
          Figure 1.16: January 1989 Estimate                                                27
          Figure 1.17: February 1989 Estimate                                               28
          Figure 1.18: April 1989 Estimate                                                  29
          Figure I. 19: June 1989 Estimate                                                  30
          Figure 1.20: Last Request Was Actually $522 Million                               31
               Higher Than First
          Figure 1.21: What Caused the $522 Million Budget                                  32
               Estimate Increase?



          Page B                      OAO/HRIMtO~73BR   Estimating   Pell Grant Program   Costs
Contents




Abbreviations

ACE        American Council on Education
CBO        Congressional Budget Office
FY         Fiscal year
GAO        General Accounting Office
OMB        Office of Management and Budget
SrS        Supplemental Loans for Students


Page 10                      GAO/IiRDfW73BR   Estimating   Pell Grant hogram   Costs
Page 11   GAO/HRD-!%I-73BR   Estimating   PeU Grant Program Costs
    Appendix I

    Pell Grants: How the Department of Education
    Estimates Program Costs

    Figure 1.1



            G&) Pell Grants


                 How the Department of
                 Education Estimates
                 Program Costs




L




                        Page 12      GAO/HRD90-73BR   Estimating   Pell Grant Program Costs
                          Appendix I
                          Fell Grants: How the Department of
                          Education Estimates Program Costs




Figure 1.2



        GJU Background

             0Grants go to most needy
             l   Maximum grant for 1988-89
                 award year was $2,200
                 l 3.2 million recipients
                 aAbout $4.3 billion funded
             l   Budget estimate for
                 fiscal year (FY) 1990 was
                 revised three times and last
                 estimate was $696 million
                 higher than first




                          Page 13                              GAO/HRD-90-73BR   Estimating   Pell Grant Program   Costa
                           Appendix I
                           Pell Grants: How the Department of
                           Education Estimates Program C!!sts




Figure 1.3



       GAO Timeframes for FY 1990 Pell
           Grant Program Budget Request
             l   Fiscal and award years differ
                 lFiscal year covers period
                  Oct. 1989 to Sept. 1990
                 mAward year covers period
                  July 1990 to June 1991
             l   FY 1990 budget request
                 4Jsed 1986-87 award year
                   data (finalized in Dec. 1987)
                 l Prepared in summer of 1988
                 @Projected Pell grant costs
                  for 1990-91 award year




                          Page 14                               GAO/HIRD-90-73BR   Estimating   Pell Grant Program   Costs
                         Appendix I
                         Pell Grants: Bow the Department of
                         Education Estimates Program Costa




Figure 1.4



        GAQ Objectives

                 GAO was asked to determine
             l   How the Department estimates
                 Pell grant costs, including
                 what factors affect costs?
             l   What caused the $696 million
                 increase?
             l   Whether the Department can
                 borrow against future
                 appropriations?




                         Page 16                              GAO/IiRDW73BR   Esthnating   Pell Grant Program Cbstu
                         Appendix I
                         PeLl Grants: How the Department of
                         Education Estimates Program Costs




Figure 1.5



         GAQ Scope

             9 Determined the Department’s
              budget process for Pell grants
             l   Determined factors used in
                 making budget estimates
             l   Reviewed components of
                 budget estimates
             mReviewed the Department’s
              authority for future borrowing




                         Page 16                              GAO,‘I3ltD~7BBR   Estimating   Pell Grant Program   Coutr
                            Appendix I
                            PelI Grants: How the Department of
                            Education EBtimates Program Costs




Figure 1.6



         G&I       Methodology


               l   Compared estimated costs,
                   budget requests, and actual
                   program costs
               l   Interviewed Department, CBO,
                   OMB, and ACE officials
               l   Requested legal opinion from
                   the Department on future
                   borrowing
                   l Past authority
                   l Current authority




                           Page 17                               GAO/HEUMO-‘73BR   Estimating   PeB Grant Program   Costs
                         Appendix I
                         Pell Grantrr: How the Lkpartment of
                         Education Estimates Program Costa




Figure 1.7



         0       What Did We Find?


             l   Department uses a three-step
                 process to estimate costs
                 *Computer cost model
                 l Program adjustments
                 aBudgetary adjustments
             l   Underestimating recipients
                 primarily caused increase
             . GAO responded separately on
               the Department’s borrowing
               against future appropriations                                                                             J




                         Page 18                               GAO/HRD9@73BR   Estimating   Pell Grant Program   Costs
                          Appendix I
                          PeU Grants: How the Department   of
                          Education Estimates hgram    Costa




Figure 1.8



        w        Department Uses Three-Step
                 Process for Budget Request
             l   Uses a computer cost model
                 to prepare initial estimate
             l   Adjusts the model’s results
                 to reflect recent legislative
                 (program) changes that the
                 model is unable to simulate
             l   Adjusts the model’s results for
                 expected budgetary shortages
                 or surpluses, resulting in a
                 final budget request




                          Page 19                               GAO/~W73BE   Estimating   PeU Grant Program   Costs
                          Appendix I
                          Pell Grants: How the Department   of
                          Education Ektimates Program Casts




Figure 1.9



        GAQ How Does the Cost Model
            Work (FY 1990)?
             l   Contained data on sample of
                 151,000 applicants/recipients
                 from award year 1986-87
             l   Used over 30 economic
                 indicators, such as income and
                 the consumer price index




                         Page 20                                 GAO,JHRIMM~BR   Estimating   PeU Grant Program   Costs
                           Appendix I
                           Pell Granti How the Department of
                           Education Estimates Program Costs




Figure 1.10



         w        Model Estimates, Budget
                  Requests, and Actual Costs

                  For award years 1980-81 to
                  1988-89
              l   Model estimates exceeded
                  actual costs by an average
                  difference of 3.63 percent
              l   Budget requests reduced
                  from model estimates
              l   Actual costs greater than
                  budget requests
   -




                          Page 21                              GAO/IiIUWO-73BR   Estimating   Pell Grant Program   Costs
                           Appendix 1
                           PeU Grants How the Department    of
                           Education Estimates Program  &stS




Figure 1.11



         w        Program Adjustments in
                  FY 1990 Budget Estimate
              l   Revised definition of
                  independent student
              l   Allowed financial aid
                  administrator discretion
              l   Awarded grants to less than
                  half-time students




                           Page 22                               GAO/HRD90-73BR   Estimating   PeU Grunt Program   Costs
                            Appendix I
                            Pell Grants: How the Department of
                            Education Estimates Program CuMa




Figure 1.12



        GAQ Budgetary Adjustments in
            FY 1990 Budget Estimate
              l   Budgetary shortage for the
                  January, February, and June
                  estimates
                  .$95.8 million, $3 million, and
                   $156.5 million, respectively
              l   Budgetary surplus of $55
                  million for the April estimate




                           Page 23                               GAO/HBD-90.73BR   Estimating   Pell Grant Program   Costs
                          Appendix I
                          Pell Grants: How the Department of
                          Education Estimates Program Costs




Figure 1.13



        GA) Major Milestones in FY 1990
            Pell Grant Budget Estimates
                  Five key dates
              l   June 1987: end of award year
                   1986-87
              l   Aug. 1988: prepare budget
                  using 1986-87 data
              l   Jan. 1989: President’s
                  budget to Congress
              l   June 1989: OMB mid-session
                  review
              l   Jan. 1990: final adjustments
                  to FY 1990 budget




                          Page 24                              GAO/HRINW73BR   Estimating   Pell Grant Program   Costs
                          Appendix I
                          PeB Grants: How the Department of
                          Education Estimates Ehgram Casts




Figure 1.14



         GAQ FY 1990 Budget Process
             Was Atypical
              l   Budget estimate normally
                  submitted to Congress once a
                  year in January with no update
              l   Four budget estimates were
                  prepared for FY 1990
                  (January, February, April,
                  and June 1989)




                          Page 25                             GAO,MRD90-73BE   Estimating   Pell Grant Program   Costs
                           Appendix I
                           Pell Grants: How the Department of
                           Education EMmates Program Costa




Fiaure 1.15



         GAD What Happened to FY 1990
             Budget Estimates?
                  Estimates kept changing
              l   January 1989: $4.740 billion
              l   February 1989: $4.592 billion
              l   April 1989: $4.517 billion
              l   June 1989: $5.262 billion




                           Page 26                              GAO/HRINO-73BR   Estimating   PeU Grant Progmn   Costs
                           Appendix I
                           PeB Grants: How the Department of
                           Education Estimates Program Costs




Figure 1.16



        GAQ January 1989 Estimate

              l   Expected recipients were
                  3,142,OOO

              l   Based on June 1988 economic
                  indicators (November 1988
                  indicators were available)
              l   Model estimate was $4.274
                  billion and budget estimate
                  was $4.740 billion




                          Page 27                              GAO/HRD9@73BR   Estimating   Pell Grant Program   Chats
                          Appendix I
                          Pell Grants: How the Department of
                          Education Estimates Program Costs




Figure 1.17



         GM       February 1989 Estimate

              l   Expected recipients were
                  3,105,334
              l   Based on November 1988
                  economic indicators
              l   Model estimate was $4.222
                  billion and budget estimate
                  was $4.592 billion


i




                          Page 28                              GAO/HRD-90-73BR   Estimatbg   PeU Grant Program   Costs
                          AppendixI
                          Pell Grants: How the Department of
                          Education Estimates Program Costa




Figure 1.18



         0        April 1989 Estimate

              l   Expected recipients were
                  3,261 ,134
              l   Based on November 1988
                  economic indicators
              l   Model estimate was $4.205
                  billion and budget estimate
                  was $4.517 billion




                          Page29                               GAO/HRD90-73BR
                                                                            EstimatingPeUGrantProgramCosti
                Appendix I
                Pell Grants: How the Department of
                Education Estimates Program Costs




GAQ June 1989 Estimate

    l   Expected recipients were
        3,640,895
    l   Based on June 1989 economic
        indicators
    l   Model estimate was $4.835
        billion and budget estimate
        was $5.262 billion




                 Page 30                             GAO,‘IUDW73BR   Estlmatlng   Pell Grant Program   caste
                                Appendix I
                                PeB Grants: How the Department of
                                Education Estimates Program Costs




Figure 1.20



        m             Last Request Was Actually
                      $522 Million Higher Than First

                  l   June 1989 estimate was
                      $5.436 billion
                  l   This estimate was reduced to
                      reflect proposed legislative
                      savings of $174 million
              0 Net request was $5.262 billion
                (compared with January
               estimate of $4.740 billion
              l       Difference is $522 million




                                                                                                                             i




                               Page 31                              GAO/HRD-90-73BR   Estimating   PeU Grant Program Costs
                             Appendix I
                             Pell Grants: How the Department of
                             Education Estimates Program Ckxxts




Figure   1.21



         G&I What Caused the $522 Million
             Budget Estimate Increase?
                    500,000 more recipients
                l   More grant recipients
                    @Students must apply for Pell
                    grant before Stafford or SLS
                l   More independent students
                    l 9% growth from FY 1988
                    aTwice the increase from
                      1987 to 1988




                             Page 32                              GAO/HRB90-73BR   Estimating   Pell Grant Program   Costs
Appendix II

Department of Education’s Processfor
Estimating Pell Grant Program Costs

                   The Department of Education performs a three-step process to prepare
                   Pell grant program budget estimates. It uses a computer cost model,
                   which incorporates a number of economic and population indicators, to
                   produce a preliminary estimate. The Department then manually adjusts
                   the model estimate to reflect the impact of recent program changes,
                   which the model cannot simulate. It further adjusts the resulting esti-
                   mate for budgetary shortages or surpluses-to reflect differences in
                   funding and program costs from previous estimates-to determine its
                   final budget request.

                   The Pell grant cost model is a computer simulation procedure for esti-
How the Computer   mating the number of Pell grant recipients and program costs. The Basic
Model Works        Grants Branch in the Department’s Division of Policy and Program
                   Development created the model, annually updates it, and has used it to
                   estimate program costs since the program’s inception in 1972.

                   The Department selects a random sample of Pell grant applicants and
                   recipients from a combined file to estimate the number of applicants eli-
                   gible for a Pell grant, whether they are dependent on others for their
                   support or provide their own, and the amount of grants awarded for the
                   budget year. For example, in preparing the fiscal year 1990 budget
                   request the Department used a random sample of 151,000 applicants/
                   recipients from award year 1986-87, which began on July 1, 1986, and
                   ended on June 30, 1987. The 1986-87 award year was the latest for
                   which the Department had complete data when it began preparing its
                   fiscal year 1990 budget during the summer of 1988.

                   Each sampled record is weighted (adjusted) with various economic
                   indicators provided by the Office of Management and Budget for esti-
                   mating changes in prospective students’ income and assets, resulting in
                   a student aid index, The index measures eligibility and calculates Pell
                   grant awards and expected disbursements for eligible students. The
                   probability of these students receiving awards is factored into the calcu-
                   lation, resulting in estimated dollar amounts and number of recipients,

                   Three organizations use the model’s database and sample of applicants
                   and recipients but each organization uses them for different purposes.
                   The Department’s Office of Planning, Budget, and Evaluation reviews
                   changes the Division of Policy and Program Development makes to the
                   model to reflect expected funding shortages or surpluses. The American
                   Council on Education uses the model to project costs of program changes
                   impacting on the schools it represents, while the Congressional Budget
                   Office uses the model to develop program cost estimates by applying its


                   Page 33                       GAO/HRD-99-73BR   Estimating   Pell Grant Program   Costs
                      Appendix II
                      Department   of Education’s Process for
                      Estimating  Pell Grant Program Costs




                      own economic indicators to the Department’s sample of applicants/
                      recipients.


Limitations of the    The Department’s Pell grant program computer cost-modeling process
                      has several known limitations that may affect its ability to accurately
Computer Modeling     predict program costs, although in practice it has been reasonably accu-
Process               rate. These limitations are a result of the timing of various milestones in
                      the program’s budget cycle.

                      The Department begins to prepare its budget request 2 years in advance
                      of the award year using the latest available information which is a year
                      old. In part, this 2-year advance preparation results from a requirement
                      that the Department submit its budget request for a fiscal year period
                      that begins 9 months before the start of the program’s award year. In
                      addition, the Department adjusts its model estimate to recognize the
                      effect of program changes for which little data are available.

                      The Department’s model uses data that are a year old because complete
                      data for the most recent award year are not available when it begins to
                      prepare fiscal year budgets. For example, when the Department pre-
                      pared its fiscal year 1990 budget in the summer of 1988, award year
                      1986-87 was the latest complete year for which data were available.
                      Complete data from award year 1987-88 were not available because the
                      Department does not close out its Pell grant recipient file until 6 months
                      following the end of the award year. Despite these limitations, the cost
                      model estimate has been a reasonably good predictor of Pell grant costs,
                      varying from actual costs by an average of only 3.63 percent for award
                      years 1980-81 to 1988-89.                                                                             s


                      The Department made manual program adjustments to the cost model
Program Adjustments   estimate for fiscal year 1990 to recognize legislative changes to the pro-
                      gram that were beyond the model’s capability to simulate, since little
                      historical data were available. Adjustments made accounted for legisla-
                      tive amendments that (1) changed the definition of independent student,
                      (2) modified financial aid administrators’ discretion to determine stu-                               E
                      dents’ cost to attend school and their expected family contribution, and
                      (3) expanded the eligibility of students enrolled for less than half-time.

                      For example, the Higher Education Amendments of 1986 (Public Law
                      99-498) changed the definition of independent student starting with
                      award year 1987-88. Students are now classified as independent if they


                      Page 34                                   GAO/HRD90-73BR   Estimating   Pell   GrantProgram   Costs
              Appendix II
              Department  of Education’s Process for
              Estimating PeU Grant Program Costs




              state, among other things, that they are either over 23 years old, a vet-
              eran of the Armed Forces, an orphan or ward of the court, or had legal
              dependents other than a spouse. Because the model could not appropri-
              ately simulate the effect of these changes, the Department adjusted the
              model estimate to assume the number of recipients affected by the new
              definition.


              The Department further adjusts its budget estimate to reflect differ-
Budgetary     ences in available funding and program costs from previous and current
Adjustments   year’s estimates. These changes are considered budgetary adjustments.
              The previous years’ changes are for the 2 fiscal years preceding the
              budget year. The 2 prior fiscal years are used because, at the time the
              initial budget estimate is prepared, data from the current fiscal year
              have not been finalized and the subsequent fiscal year is about to begin.
              The Department begins to prepare its budget estimate about 2 years in
              advance of the start of the award year. This step also includes adjust-
              ments made to reflect estimated savings from the Department’s legisla-
              tive proposals.

              The Department’s initial fiscal year 1990 budget estimate was adjusted
              for expected shortages of $96 million for fiscal years 1988 and 1989.




              Page 36                              CiAO/IUWQO-73BB Estimating   Pell Grant Program   Costa
Appendix III

Table Supporting Figures in Report Text


Table 111.1:Comparison of Pell Grant Cost
Model Estimates, Actual Program Costs,      Dollars in bilhons
and Final Budget Requests: Award Years      ~        .--         ~___~       ~~       ~~       ~-
                                                                                                    Actual program     Final budget
1980-81 to 1988-89                          Award year                            Model estimate                cost         request
                                            1980-81                                        $2.464             $2.415           $2.444
                                            1981-82      ..--      -                        2.422              2.299           2.820
                                            1982-83          ~           ~..-~              2.433              2.430           2.188
                                            1983-84                                         2.447              2.806           1.400
                                            1984-85                                         3019               3.048           2.664
                                            1985-86                                         3.681              3.586           2.800
                                            1986-87                                         3.576              3.455           2.691
                                            1987-88                                         3.862              3.754           3.250
                                            1988-89                                         4.519              4.468           2.710




                                            Page36                                   GAO/HRD-00.73BR
                                                                                                  Estimathg Pell GrantProgramCoata
Appendix IV

Department of Education’s Fiscal Year 1990
Pell Grant Program Budget Request

                                         The Department began to prepare its fiscal year 1990 budget request in
                                         the summer of 1988, about 2 years in advance of the 1990-91 award
                                         year. The fell grant program budget is part of the federal budget sent to
                                         the Congress in January of each year. However, it is prepared for an
                                                                                                                                                     I
                                         award year that begins 9 months after the start of the fiscal year.

                                         The Department normally submits one annual Pell grant program budget
                                         request to the Congress. However, for fiscal year 1990 it prepared four
                                         budget estimates-an initial budget request and three revisions-the
                                         last of which was the June 1989 budget request. Two revisions resulted                                      s
                                         in lower budget estimates while the third was $522 million higher than
                                         its original January estimate. Table IV.1 compares the major cost com-
                                         ponents of the four estimates.                                                                              I


Table IV.1 : Comparison of Education’s
Fiscal Year 1990 Pell Grant Budget       Dollars in mllhons
Estimates                                                                           Jan. 1969         Feb. 1989         Apr. 1989     June 1989
                                         Model estimate                               $4,274.5          $4,222.2         $4,205.2        $4,835.2
                                         Program adjustment9                             369 7              366.8            366.8          270.3
                                         Budget adjustments                               95 8                3.0           -55.0           156.5
                                         Total budget estimate                       $4,740.0           $4,592.0         $4,517.0       $5,262.0
                                         %cludes   admlnlstrative   allowance of $5 per recipient paid to schools


                                         The Department’s June 1989 budget request was $522 million more than
                                         its original request in .January 1989. Discussions follow on (1) the rea-
                                         sons why four estimates were made, (2) how each estimate differs from
                                         the previous one, and (3) an overall comparison of the January and June
                                         1989 budget requests.


                                          The Department’s *January 1989 estimate of $4.74 billion, which pro-
January 1989                             jetted 3,142,OOOPell grant recipients, was based on the June 1988 eco-
Estimate                                 nomic indicators. The estimate did not incorporate the available
                                         November 1988 economic indicators because Department officials said
                                         they did not have time to update the computer model to reflect them.
                                         (The Office of Management. and Budget issues economic indicators twice
                                         a year-in June and November-for        agencies to use in developing their
                                         initial and mid-year budget estimates.)




                                         Page 37                                     GAO/HRD-90-73BR       Estimating   Pell Grant Program   Costs
                          Appendix IV
                          Department   of Education’s Fiscal Year 1990
                          Pell Grant Program Budget Rquest




February 1989             administration’s budget. This estimate projected 37,000 fewer recipients
Estimate                  and a decrease of $148 million from the January estimate. Contributing
                          to the decline were a (1) $93 million decrease in the budgetary adjust-
                          ment for an anticipated fund shortage (from $96 million to $3 million);
                          (2) $52 million decrease in the computer cost model estimate, which was
                          based on the November 1988 economic indicators; and (3) $3 million
                          decline in manual program adjustments.

                          While the February estimate was being processed at the Office of Man-
                          agement and Budget, the American Council on Education discovered an
                          error in the computer model. Advised of the error, the Department cor-
                          rected its model and prepared another estimate in April. The Office of
                          Management and Budget decided to wait until its mid-session review in
                          June to process a budget amendment incorporating the changes.

                      1

                          In April 1989 the Department revised its budget estimate because of the
April 1989 Estimate       model error. The new estimate decreased $75 million from the February
                          estimate primarily because of (I) a reduction of $17 million in the com-
                          puter cost model estimate which was attributable to a programming
                          error, and (2) a $58 million budgetary adjustment from an anticipated
                          shortage of $3 million to an expected surplus of $55 million.


                          The Department’s June 1989 budget estimate increased $745 million
June 1989 Estimate        from its April estimate and included a projected increase of 380,000
                          grant recipients. The $745 million increase consisted of (1) a $630 mil-
                          lion increase in the cost model estimate, (2) program adjustments which
                          reduced the estimate by $97 million, and (3) a net budgetary adjustment
                          for an anticipated shortage of $212 million (which included the Depart-
                          ment’s proposed legislative program changes that would save $174
                          million).

                          The cost model estimate increase was due in large part to (1) a growth in
                          applications, (2) an increase in the number of independent students, and
                          (3) a requirement that applicants for Stafford loans and Supplemental
                          Loans for Students apply first for Pell grants. The program adjustment
                          reduction was largely due to a $104 million decline in the estimated cost
                          attributed to financial aid administrators’ discretion.

                          The $174 million in savings was based on the Department’s legislative
                          proposals requiring (1) students admitted to postsecondary institutions


                          Page 38                                GAO/HRD90-73BR   Estimating   Pell Grant Program   Costs
                                         Appendix IV
                                         Department   of Education’s Fiscal Year 1990
                                         Pell Grant Program Budget Request




                                         without a high school diploma to pass a test, measuring their ability to
                                                                                                                                                  I
                                         benefit from the education, prior to enrollment, and (2) grant recipients
                                         who generally fail to complete their periods of enrollment to forfeit a
                                         pro rata portion of their grants. This latter proposal, projected to save
                                         $66 million, was included in the Department’s fiscal year 1990 appropri-                                 I
                                         ation act (Public Law 101-166).


                                         The Department’s June budget request projected an increase of about
Comparison of                            842,000 more applicants and almost 500,000 more recipients than its
January and June                         January request. Department officials said the reasons for the increases
Budget Requests                          were based on their analysis of operational data that showed consistent
                                         increases in both over comparable periods of time. Table IV.2 shows the
                                         number of expected applicants and recipients and the economic indica-
                                         tors the Department used in developing the two estimates.

Table IV.2: Comparison of Award Year
1990 Pell Grant Applicants and                                                            January                     June
Recipients in the Department’s January                                                    request
                                                                                            ~...~.--               request           -.Change
and June 1989 Budget Requests            Applicants                                      6,310,350               7,151,944          +El41,594
                                         Recipients                                      3,142,ooo               3,640,895          +498,895
                                         Percentage receivrng awards                              50                     51                 +1
                                         Date of economic Indicators                    June 1988               June 1989                1 Year


                                         In comparing the cost elements of the January and June budget requests
                                         we found that the increase in the June request consisted of (1) a higher
                                         computer cost model estimate ($560.7 million), (2) an increase in the
                                         expected cost for grants to students attending school less than half-time
                                         ($5 million), (3) a higher administrative allowance to schools due to an
                                         expected increase of 500,000 recipients ($2.5 million), and (4) a budget-
                                         ary adjustment of $60.7 million. These increases were partially offset by
                                         a $106.9 million decrease in the estimate of financial aid administrator’s
                                         discretion and projected savings of $174 million. Table IV.3 analyzes the
                                         changes in the major cost components of the two estimates.




                                         Page 39                               GAO/HRD-90.73BR         Estimating   Pell Grant Program Costs
                                       Appendix N
                                       Department   of Education’s Fiscal Year 1990
                                       Fell Grant Program Budget Request




Table IV.3 Major Cost Components for
the January and June 1989 Pell Grant   Dollars in millions -.-~
Budget Requests                                                                            January                     June         Increase/
                                                                                           request                  request         decrease
                                       Model estimate __~.-~.       ~.                     $4,274.5
                                                                                            -_      __              $4,835 2            $560.7
                                       Program adjustments  -.       -
                                         independent .-- students
                                                               ~~__ .~_____I                  152.0                    1520                  0.0
                                          Less-than-half-time
                                                        .-       students                      38.0           --        43.0                 5.0
                                       -___-
                                          Financial aid administrators’
                                             discretion        ...-                           164.0                     57.1             -106.9
                                                ___~
                                       AdmInistrative   allowance                              15.7.                    18.2                 2.5
                                       Budgetary adjustments                                    95.8                   156.5”               60.7
                                       Total                                              $4,740.0                  $5,262.0             $522.0
                                       aThis figure Includes the estimated savings of $174 million for the Department’s proposed legislative
                                       changes (The Department agreed that we could consider these savings as a budgetary adjustment,)
                                       Without these savings the difference between the January and June budget requests would have been
                                       $696 mllllon, rather than $522 mhlion.




                                       Page 40                                 GAO/HRD90-73BR          Estimating    PeB Grant Program   Costs
Appendix V

Major Contributors to This Briefing Report


                  Joseph J. Eglin, Assistant Director (202) 245-9623
Human Resources   Christopher C. Crissman, Assignment Manager
Division,         Theodore F. Zeunges, Evaluator-in-Charge
Washington, DC.




                  Page 41                     GAO/HRD90-73BR   Estimating   Pell Grant Program   Costs
                                                                             i




                                                                         i




Page 42   GAO/HRD90-73BR   Estimating   Pell Grant Program   Costs
                                                                     i
                                                                   i




Page 43   GAO/HRD90-73BR   Estimating   Pell Grant Program Costs
Related GAO Products


              Pell Grants: Who Receives Them and What Would Larger Grants Cost
                               June 14, 1988)
              (GAO/HRD-~~-~~~BR,

              GAO'SViews on the Default Task Force’s Recommendations for Reducing
              Default Costs in the Guaranteed Student Loan Program (GAO/T-HRD8%7,
              Feb. 2, 1988)

              Pell Grant Validation Imposes Some Costs and Does Not Greatly Reduce
              Award Errors: New Strategies are Needed (GAO/PEMD-85-10,Sept. 27,
              1985)

              Many Proprietary Schools Do Not Comply with Department of Educa-
              tion’s Pell Grant Program Requirements (GAO/HRD-84-17,
                                                                  Aug+ 20, 1984)




(104637)      Page 44                    GAO/BRDQO-73BR   Estimating   Pell Grant Promm   Costs
           .


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