Highlights of the President's FY2013 Budget

February 13, 2012 Highlights of the President’s FY2013 Budget: Budget Again Calls for Perkins “Modernization and Expansion” Through Conversion to Direct Lending
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The President today sent his proposal for spending on federal programs new and old to Congress today, an annual event that sets the stage for discussions about what the government should be doing for next the fiscal year. Fiscal Year 2013 starts on October 1, 2012 and runs through Sept. 30, 2013.

The budget proposes a deficit of $1.33 trillion for the year, a fact that will draw a lot of attention and that the Republican opposition is already focused on. The lead-up to this year’s budget release has contained more discussion of higher education initiatives than usual, with a Sunday press briefing unveiling a new initiative aimed at providing funding to community colleges via the Departments of Labor and Education.

The budget, for the fourth year in a row, contains a proposal to completely change the Perkins Loan Program, eliminating the current program and replacing it with a new supplemental unsubsidized direct loan program. The new program, labeled Perkins in the budget, would resemble the current program only in that funds to lend would be allocated to participating colleges and universities with a national ceiling on total loan funds available of $8.5 billion per year. Here is how the Administration describes the Perkins proposal in its budget:

Federal Perkins loans.—Institutions award low-interest loans from institutional revolving funds, which are comprised of Federal Capital Contributions, institutional matching funds, and student repayments on outstanding loans. No new Federal Capital Contributions have been appropriated since 2004. The Budget proposes to modernize and expand the Perkins Loan program so more colleges can participate and more students receive access to these loans. The proposal would increase, beginning on July 1, 2013, the annual loan amounts available to students to $8.5 billion from the current $1 billion. Rather than operating through institutional revolving funds, the Federal Government would originate and service Perkins Loans. Loan volume would be allocated among degree-granting institutions. This new formula will encourage colleges to control costs and offer need-based aid to prevent excessive indebtedness. Schools would have some discretion about student eligibility. Perkins Loan borrowers would be charged a 6.8 percent interest rate, the same as in the Unsubsidized Stafford Loan program. These loans would accrue interest while students are in school and other loan terms and conditions would be the same as current Unsubsidized Stafford loans. As current Perkins Loan borrowers repay their loans, schools would remit the Federal share of those payments to the Department of Education, beginning at the statutory date described in the Higher Education Act of 1965. Schools would retain their own share of the revolving funds, as well as amounts sufficient to cover the costs of the various Perkins Loan forgiveness provisions. Mandatory loan subsidy costs of this proposal would reduce 2013 outlays by $648 million and are displayed in the Federal Perkins Loan program account.

From the perspective of students, the new proposal is simply a new unsubsidized Stafford Loan program. The terms and conditions of the loans, as proposed by the Administration budget, would be exactly the same as unsubsidized Stafford loans. The same servicing contractors that now bill and collect for the Direct Loan Program would carry out all servicing of the new direct Perkins loans.

The Administration is using this proposal as a way of saying that it wants to pressure institutions of higher education to hold down their prices and graduate more students from low-income backgrounds. Details are not provided, but the outline is that some of the new direct loan allocation would be based on where the institution ranked in its net price increases compared to its peers. Another share of the allocation would be based on how many Pell Grant recipients were graduated by the institution. The rest would be based on total need of the institutions students.

The Administration is also using this proposal to provide for budgetary savings aimed at Pell Grant funding for 2014-2015 and beyond. In addition to the Perkins to Direct Loan conversion, the budget proposes limiting Stafford Loan eligibility to 150% of academic program length as well as changes to the payment of guarantors for rehabilitated loans. The collection fees guarantors can assess on defaulted loans would be reduced to 16% and their retention share of these loans would also be eliminated. In removing these “excessive payments” to GAs, expanding Perkins via Direct Lending, and reforming subsidized Stafford eligibility, the Administration claims these moves will generate more than $14 billion in budgetary savings which could be put toward Pell Grants and/or preventing the interest rate spike on Subsidized Stafford Student Loans.

For COHEAO members, it is extremely important to note that the President’s FY 2013 budget is just a set of suggestions and requests. It is not law, and most of it, including the “Direct Perkins Loan” proposal, cannot be put into effect unless Congress changes the law.

The House of Representatives, which is controlled by Republican opponents of the President Obama, has shown no interest in the Direct Perkins proposal, and Congress was not able to pass it even when controlled by the Democrats, the president’s allies, in 2010. Therefore, it is important to continue to follow the directive of the Department of Education, as re-stated explicitly on Jan. 30,2012 at the COHEAO Annual Conference: the traditional Perkins Loan Program continues to operate normally and institutions should make loans to their students and should make sure they are not holding excess cash in their Perkins Loan funds. Excess cash may be seized by the Department.

The National Journal had the following perspective in an article that appeared over the weekend:

“If there was ever a year to ignore the president’s annual budget proposal, this is it. The White House plan to be released on Monday is a starting pistol in a long budget fight more than it is a blueprint for a Congress that mostly ignores the plan. The gun will be more muffled than ever this year. That’s because lawmakers have already agreed on a fiscal 2013 discretionary spending cap that both sides acknowledge will be what appropriators use as a limit for the year.

Democrats say the $1.047 trillion cap, included in last year’s Budget Control Act, is for all intents and purposes, a budget. That is what Senate Majority Leader Harry Reid, D-Nev., insisted when he said he will not bring a fiscal 2013 budget resolution to the floor, even if the Senate Budget Committee passes one.”

The budget has been available for less than an hour. COHEAO will continue to pore through the data and proposals and provide you with information through Sparks throughout the week and/or the upcoming Torch, which is scheduled for publication on Friday, February 17. • Additional information on the Budget is available online: http://www.whitehouse.gov/omb/budget/Overview • The Budget Appendix, which contains scores of data behind the President’s budget and proposals, is available online: http://www.whitehouse.gov/omb/budget/Appendix