Pell grants on the line

WASHINGTON (CNNMoney.com) -- On Sunday, the House is set to vote on an historic overhaul of the nation's health care system. It will also take up an issue that will get far less attention but could affect the wallets of millions of Americans.

The nation's popular Pell grant program, which provides federal grants to millions of Americans based on financial need, is facing a $19 billion budget gap.

The economic downturn is a big part of the cause. Federal officials who run the program were caught off guard by the sheer number of people who went back to school and earned low enough incomes to qualify for the grants. They underestimated the number of recipients for this year by 765,000.

Secretary of Education Arne Duncan warned this week that grants for 8 million students could be reduced next year if the legislation doesn't pass or Congress doesn't take other steps to fund the grants. And nearly 600,000 students could lose their grants outright.

This year, the maximum Pell grants were $5,350, in part because of extra funding contained in the Recovery Act. But in 2011, the maximum award is slated to drop to $2,150 if Congress does not act.

The Obama administration's funding solution now before Congress is part of a proposal to end federal subsidies to private lenders that make federally-backed student loans. If passed, the lending overhaul would produce $36 billion in savings that will be dedicated to Pell grants, including $13.5 billion to plug the current gap.

The bill wouldn't fill the entire shortfall and it's not clear how the rest of the $5.5 billion gap would get plugged.

Republicans who oppose getting rid of the subsidized private loan program say that the recent stimulus-related hikes in Pell grant funding were a windfall that taxpayers can't afford.

"We're facing billions in a shortfall, because the increases that were made were not sustainable," said Alexa Marrero, spokeswoman for Rep. John Kline, R-Minn., the ranking Republican on the House education panel.

As the recession started to set in, during the 2007-2008 school year, 27% of all undergraduates received an average grant of $2,600, according to the Department of Education. The grants tend to go to families making less than $40,000 a year.

Colleges and students have been hitting the halls of Congress to lobby for more money. On Tuesday, some 500 students will rally in Washington, said Lindsay McCluskey, vice president for U.S. Student Association.

"It hasn't been prioritized so it doesn't have the flexibility to cope for times like these," McCluskey said. "It's very vulnerable."

Kim Behrendt, a 28-year-old student at University of Wisconsin in Marinette, says he may have to drop out of school if the government doesn't cough up more Pell grant funding.

The father of four works at an auto parts foundry and went back to school to study business management after his workplace laid off 120 last year.

"The foundry is really really beating up my body," said Behrendt, who wants to open his own business like an arcade for kids. "I'm hoping to seek new opportunities."