FY10 Budget Numbers and Proposals

Typical for incoming administrations that have  had insufficient time in office to submit  a complete budget to Congress by early February, the Obama administration released only a summary of the policy initiatives that will be included in its full budget, expected to be released in April. The outline does not include spending levels for particular programs, but does include an estimate of total expenditures for FY10 of $3.552 trillion. This top line number compares to $3.938 trillion in the current fiscal year, and $2.983 trillion in FY 2008.

Also included in the budget overview are broad changes to federal student aid programs and a series of specific tax policy changes, together with estimates of their impact on tax collections. 

Federal Loan Programs Revisited

The initial budget overview contains a number of significant changes to the federal student aid program, but does not include all the details necessary to fully analyze the proposals. The budget signals the Obama administration’s intention to make the following revisions: 

1. Make the Pell Grant program an entitlement program. Under current law, the total amount of funding and the maximum Pell Grant award for students are established each year when Congress approves appropriations bills. If the Pell Grant program were to become an entitlement, the funding needed to make Pell Grant awards would flow automatically to the Department of Education.
   The administration’s proposal also includes a provision to annually increase the maximum award by an amount equal to the change in the Consumer Price Index plus 1 percent. This change would allow students and institutions to better predict the future value of their Pell Grant awards. The budget also proposes to increase the maximum Pell Grant for the 2010-11 school year by $200, to $5,550.
2. Make all Stafford student loans through the Direct Loan program. This would result in the  ending of the Federal Family Education Loan Program. Under current law, colleges and universities can choose which of the two programs they participate in (and can participate in both). The administration’s budget argues that the federal government could save as much as $4 billion annually if all Stafford Loans were made through the Direct Loan program. The changeover would occur by July 2010.
3. Restructure the Perkins Loan program. Under the new budget, funding for the Perkins Loan program would increase from $1.1 billion a year to an estimated $6 billion a year, and all Title IV participating schools would be eligible to make loans. As part of the proposed changes, the servicing of Perkins loans would be assumed by the Department of Education, which would retain the federal share of prior capital contributions into the program. At this time, it is unclear what would happen to campus contributions to institutions’  Perkins Loan revolving funds.
   In addition, the in-school interest subsidy would be eliminated. However, the 5 percent fixed interest rate, as well as the existing loan forgiveness provisions and loan limit, would remain unchanged. The historical allocation formula would be replaced with allocations based on the number of students with financial need at the particular institution. Schools will retain discretionary control over student eligibility. The goal of these changes is to provide institutions the ability to offer students  an alternative to private loans.
4. Create a $2.5 billion "Access and Completion Incentive Fund." The fund’s stated purpose is to enable states to experiment with new efforts to help low-income students complete their college educations.
5. Simplify the federal student aid application form, known as the FAFSA (Free Application for Student Aid.

Addressing Taxes

Among the tax changes summarized in the document, the Obama administration proposes the following proposals of interest to higher education institutions:

1. Make permanent the temporary changes to the HOPE tax credit. Under the recently-enacted American Recovery and Reinvestment Act, this credit was renamed the "American Opportunity Tax Credit" and temporarily expanded to include four years of college expenses, rather than two. In addition, the maximum tax credit per student will increase from $1,800 to $2,500 each year. Finally, the income levels used to restrict eligibility for the credit will increase, and a portion (up to 40 percent of the credit) will be refundable, meaning that it can be paid out to students and families that do not owe income taxes.
2. Restrict the allowed amount  of itemized deductions. As part of the administration’s health-care initiative, the budget proposes to limit the value of itemized deductions to 28 percent.  As a result, taxpayers in higher tax brackets would not receive a full income tax deduction for their charitable giving, perhaps influencing their decision making regarding overall donations in general and contributions to higher education institutions, in particular

A Note on Research

Finally, while the budget does not include sufficient details to fully assess the resources that would be directed to support federal research efforts, the document does suggest that additional resources will be provided to the National Institutes of Health for cancer research. Other   unspecified increases are designated for the National Science Foundation and the Department of Energy.