The Obama administration would change the current system of subsidized student loans to one based on market rates set at the start of each academic year and pegged to the cost of government borrowing.
The Barack Obama administration is proposing a $140 increase in the top Pell Grant plus more work/study funds and level support for minority-serving colleges and universities in a fiscal 2014 budget blueprint released Wednesday.
Overall, the U.S. Department of Education would realize a 4.6 percent increase, to $71 billion, for the next fiscal year. Also included in the budget is a plan to take Congress out of the business of setting student loan interest rates, instead moving to a market-based system.
One overarching goal in the budget is to address a “stubborn opportunity gap” facing many children and youth, said Education Secretary Arne Duncan. To help address such challenges, the budget includes more funds for low-income students and a $1.3 billion down payment on a new federal/state preschool partnership to expand quality early learning programs.
A new $1 billion Race to the Top competition would focus solely on higher education, as up to college affordability, access, completion and quality.
“Strategic investments in our educational system will not only provide more opportunities for millions of Americans, but they will strengthen our nation’s workforce as well,” Duncan said in presenting the budget plan.
For student financial aid, the budget is a mix of small increases and level funding. The maximum Pell Grant would increase from $5,645 to $5,785 next year. Given high demand in recent years, many analysts have concerns about a funding shortfall in the program. However, the White House says its budget would provide enough funds to ensure full funding of the program through 2016.
“We appreciate that the president has made higher education a priority with a Pell Grant increase,” said Ethan Senack, higher education advocate at US PIRG.
College work-study also would receive more funding, part of a plan to double participation in the program within five years. Funding would increase by $150 million, to $1.12 billion next year.
Supplemental grants to needy students would remain unchanged at $734 million, while the administration would expand by eight-fold the loan volume under the Perkins Loan program. Together with work-study, these programs comprise the “campus-based” student aid system that gives colleges considerable flexibility but which could change dramatically under the budget.
Rather than rely on a funding formula that some have called outdated, the administration is proposing a new framework that rewards colleges that enroll and graduate Pell-eligible students and keep tuition increases manageable.
Elsewhere, funding for historically Black colleges and universities and Hispanic-serving institutions would remain unchanged at $313 million and $221 million, respectively. Support for these programs also would continue at current levels:
n Tribal colleges: $55 million.
n Predominantly Black colleges and universities: $24 million.
n HBCU graduate institutions: $59 million.
n Alaska-Native and Native Hawaiian-serving institutions: $28 million.
n Asian American and Pacific Islander-serving colleges: $8 million.
College access programs such as TRIO and GEAR UP would continue at current levels, funded at $840 million and $302 million, respectively, the budget states.
One far-reaching change in the higher education budget would alter the formula for student loan interest rates. Congress currently sets rates on subsidized student loans, but many policymakers have called for changes to de-politicize this system. Unless Congress acts before July 1, for example, interest rates would double from 3.4 percent to 6.8 percent on new loans.
The Obama administration would change the current system to one based on market rates set at the start of each academic year and pegged to the cost of government borrowing.
But the plan would not set any caps if interest rates rise over the next few years, as many expect. That omission has prompted criticism from several student and consumer groups.
“We’re disappointed with the proposal for student loan interest rates,” said US PIRG’s Senack. If the economy improves and interest rates rise, he said, “The likely result is significantly higher rates for students.”
In a phone call with reporters, Education Department officials said their proposal would minimize most of these effects by making it easier for students to repay loans based on their post-college earnings. In the years after college graduation, when they may start with low salaries, payments would be capped at no more than 10 percent of discretionary income, they said.
Under this initiative, also known as Pay As You Earn, any remaining loan balances would be forgiven after 20 years.
But representatives of US PIRG, Rock the Vote and three other youth organizations expressed concerns. “Students have never taken out federal student loans without a cap on how high interest rates can go,” the groups said in a joint statement.
Just before the release of the budget, several of the same groups released a report noting that the federal government could reap as much as $36 billion in profit from student loans if interest rates double on July 1.
Yet there may be growing support for a market-based solution. Many Republicans in the House of Representatives have endorsed this approach, and Rep. John Kline, R-Minn., chairman of the House Education and Workforce Committee, said he welcomed the president’s idea. Returning to a market-based system “just makes sense,” he noted.
Rep. George Miller, D-Calif., senior Democrat on the House education panel, was not as enthusiastic. Interest rates are closely linked to college debt and student aid, he said—all subjects that require extensive debate.
“I believe that a long-term solution on student loan rates is best addressed as part of Congress’ efforts to reauthorize the Higher Education Act,” he said, with input from colleges, students and education experts.
Despite concerns about Obama’s interest rate plan, Senack told Diverse that market rates are “a perfectly viable solution” but only if students and families get protection from sudden rate increases.
The president’s budget now goes to Congress, where the House and Senate will hold hearings before they begin to write spending bills for the 2014 fiscal year, which begins Oct. 1.
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