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FY14 Budget Plan Includes New Student Loan Interest Rate Proposal

April 17, 2013

The president delivered his annual budget request, typically released the second week of February, on Wednesday, April 10. The $3.77 trillion FY14 request was delayed by two months largely because of budget uncertainties related to sequestration. President Obama's plan includes significant changes to federal student loan programs, and renews a number of higher education proposals calling for reforms to campus-based aid programs.

Student Loans

Last year, with a price tag of $6 billion, the White House led an effort to prevent the interest rate for federally subsidized Direct Loans from doubling from 3.4 percent to 6.8 percent. Given only a one-year reprieve, the rate is again set to double to 6.8 percent on July 1. The White House now proposes to link student loan interest rates (on new federal loans only) to that of 10-year Treasury bonds, with different rates for subsidized Stafford Loans, unsubsidized Stafford Loans, and PLUS Loans:

  • Subsidized Stafford Loans: 10-year Treasury +0.93 percentage points
  • Unsubsidized Stafford Loans: 10-year Treasury +2.93 percentage points
  • PLUS Loans: 10-year Treasury +3.93 percentage points

Upon release of the president's budget request, a coalition of student advocacy groups including US PIRG, Young Invincibles, Rock the Vote, and others, noted the Obama plan may prove beneficial in the short-term, but provides no protection against rising interest rates in the future, stating, "Without a cap, this proposal falls far short of the comprehensive reform to student loans that we need." In fact, without a cap, the variable rate could surpass the scheduled increase to 6.8 percent.
The president also proposes expanding a "Pay as You Earn" plan to all borrowers, which, for those who take part in the plan, would cap payments at 10 percent of their prior-year discretionary income, and any balances remaining after twenty years of repayments would be forgiven. The budget also includes a plan to alter the Federal Family Education Loan rehabilitation program.

Student Aid Funding

  • Pell Grants. The president seeks a $5,785 maximum Pell Grant award for academic year 2014-15 (a 2.48 percent increase over the prior year).
  • Campus-based Aid. The budget this year, as proposed in previous years, would tie distribution of federal campus-based aid—Supplemental Opportunity Grants (SEOG), Federal Work-Study (FWS), and Perkins Loans—to three principles: keeping down net tuition; providing good value; and serving low-income students effectively, although these principles are not thoroughly defined.
  1. There is a request for an increase of $150 million in FY14 for the FWS program, as a part of a longer-term White House plan to double the number of Work-Study participants over five years.
  2. The White House proposes expanding the Perkins Loan program to make the loans available at up to 2,700 additional institutions. In doing so, the servicing of Perkins Loans would then be assumed by the Department of Education, which would retain the federal share of prior capital contributions into the program.

Rather than include these changes to the campus-based aid programs in a FY14 final budget agreement, it is more likely that Congress will push off consideration of these proposals until deliberations begin over the next reauthorization of the Higher Education Act.

TEACH Grants/Presidential Teaching Fellows. The President would replace the TEACH Grant program with a new Presidential Teaching Fellows program, "specifically focused on ensuring that recipients enter, remain, and thrive in the field of teaching." The new program would include new state-based requirements, and failure by individual recipients to fulfill the requirements of the fellowship would result in a conversion of the grant to a Direct Loan.

Higher Education Programs

The White House again proposes a $1 billion competitive grant program, "Race to the Top-College Affordability and Completion," designed to provide states the incentive to revamp the state financing structure for higher education, facilitate on-time completion, and maintain adequate levels of funding for higher education. A new $260 million "First in the World Fund" competition would promote innovation and effective strategies for boosting productivity and efficiency.

Contact

Liz Clark
Director, Congressional Relations
202.861.2553
E-mail