The President’s FY 2014 Budget

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April 12, 2013 · by mlivolsi · Spark Notes

April 10, 2013

Prepared by: Wes Huffman (whuffman@wpllc.net)

Today, the President released his budget for Fiscal Year 2014. In terms of student loans and higher education, the proposal was very much like last year’s, including a call for eliminating traditional Perkins Loans and replacing them with a direct loan called Unsubsidized Perkins. Notably, the budget doesn't propose to change the Perkins program until after FY2014. At a Department of education briefing this afternoon, a Budget Office official said that the program definitely continues through FY2015, re-iterating previous ED guidance. Below are some of the highlights, as identified by the White House:

• Campus-Based Aid Programs. The Budget provides more than $10 billion for Supplemental Educational Opportunity Grants, Federal Work Study, and Perkins Loans, including a $150 million increase for the Federal Work Study program to put the program on track to double the number of participants over five years. The Budget also proposes reforms to these programs so that the funds are directed toward institutions that are succeeding in enrolling and graduating students from low-income families, setting a responsible tuition policy, and demonstrating good value.

• Maintains a Strong Pell Grant Program. Since 2008, the Administration has increased the maximum Pell Grant by more than $915, to $5,645. The Budget continues the Administration’s strong commitment to the Pell Grant program and to preserving the maximum award, and includes measures that ensure full program funding through the 2015–2016 academic year. The Administration believes that action must be taken to keep the Pell Grant program on a sound footing, and that reforms such as those included in the Budget are necessary to maintain this critical investment in opening the doors of opportunity to all Americans and strengthening our Nation’s competitiveness.

• Makes Student Loan Interest Rates More Market-Based. Under current law, interest rates on subsidized Stafford loans are slated to rise this summer from 3.4 percent to 6.8 percent. At a time when the economy is still recovering and market interest rates remain low, the Budget proposes a cost-neutral reform to set interest rates so they more closely follow market rates, and to provide students with more affordable repayment options. The rate on new loans would be set each year based on a market interest rate, which would remain fixed for the life of the loan so that student borrowers would have certainty about the rates they would pay. The Budget also expands repayment options to ensure that student borrowers do not have to pay more than 10 percent of their discretionary income on loan payments.

In terms of Perkins Loans, the proposal has received one minor tweak to conform with changes proposed for the Stafford and PLUS loan programs—annually changing interest rates. Beyond that change to the interest rate, the Perkins proposal is the same: The President is calling for the elimination of the current program to be replaced by essentially an expansion of Direct Lending under the terms and conditions of the Unsubsidized Stafford Loan Program. The President’s proposal calls for loan allocations under the new program to be tied to the enrollment and completion of Pell Grant recipients, among other measures for providing “good value,” particularly for those with low incomes.

Importantly, without legislative changes, the current program will continue. In their budget materials, the Department of Education indicated the current program is authorized through 2014 with an automatic extension to 2015, just like most of the other Title IV programs.

As COHEAO members know, the President’s continued insistence upon proposing the Perkins “modernization and expansion” has made obtaining funding a challenge. If Congress rejects the Unsubsidized Perkins proposal, as they have done for the past four years, funding is still needed for loan cancellations in the current program. This year’s budget shows what COHEAO members have known all along, this unfunded requirement is depleting an important source of financing for low-income students and families.

This year’s budget appendix shows that the amount available for Perkins Loans is dwindling. Last year, the budget indicated roughly $970 million would be lent each year in Perkins Loans. This year, it states that $857 million was lent in 2012 and projects that same total across 2013 and 2014. Notably, the George W. Bush Administration called for the elimination of the Federal Capital Contribution (FCC) because the program had reached $1 billion in 2004. Now, in the face of increasing college costs, funds are diminishing under a Democratic administration—well below the $1 billion marker set by the Bush Administration and its PART tool.

The President’s proposal on Stafford and PLUS loan interest rates looks very much like proposals from Republicans in the House and Senate. In fact, the day before the release of the President’s budget, three Republican Senators—HELP Ranking Member Lamar Alexander (R-TN) & Sens. Richard Burr (R-NC) and Tom Coburn (R-OK)—Introduced a measure, S. 628, which also calls for “market-based” rates.

Under the Coburn-Burr plan (so named because the two introduced the same bill last year), all Stafford and PLUS loan interest rates would be tied to the 10-year Treasury note plus 3 percent. The President calls for differentiation among the Stafford, Unsubsidized Stafford, and PLUS loan rates. A table comparing the two proposals is listed below:

Loan President Spread Coburn-Burr Spread Current 10-Yr T-Bill Rate (President) Rate (Coburn-Burr)
Sub Stafford 0.93 3.00 1.81 2.74 4.81
Unsub Stafford 2.93 3.00 1.81 4.74 4.81
PLUS (Grad & Parent) 3.93 3.00 1.81 5.74 4.81

As the table outlines, there is relatively little difference between the President’s plan and the Coburn-Burr legislation. House Education and the Workforce Committee Chairman John Kline has called for similar legislation, but has yet to introduce anything. The remaining key player is HELP Committee Chairman Tom Harkin (D-IA).

In the past, Harkin has indicated a willingness to accept variable rates, provided there is a cap on the overall interest rate. The President explicitly removed such caps, which in addition to Harkin, is a critical point for student groups who worked extensively in support of the President’s campaign effort. The day before the release of the budget three such groups—the United States Student Association (USSA), US PIRG, and Young Invicibles—released a report criticizing (and vastly overstating) the “profits” for Uncle Sam under the Direct Loan program in advance of their advocacy efforts around the doubling of Subsidized Stafford rates. According to ED officials, the Administration believes that its expansion of income-based repayment to cover all federal loan borrowers will serve the same purpose as a rate cap.

A surplus in the Pell Grant program caught many by surprise a few months ago, but it has relieved some pressure on the Department of Education’s budget. The President’s budget indicates it can fully fund Pell through 2015-2016. The maximum award for the upcoming year is proposed at $5,785.

With Pell Grants on stable footing, the major question for the year will be interest rates. On April 16, the HELP Committee is scheduled to host a hearing on the student loan programs and college affordability which is likely to give some indication on how Chairman Harkin is leaning on the issue. The deadline of July 1, particularly given the “#dontdoublemyrate” rhetoric of last year’s campaign, continues to loom.

Even with bipartisan agreement on the need for market-based rates, a comprehensive review of the student loan and college cost issue seems like a major lift before the July 1 deadline. Details, such as interest rate caps and the role of IBR/Pay as You Earn in making college truly “affordable,” need to be discussed, which leads some observers to believe another one-year fix on Stafford rates will happen and many of these proposals will receive consideration in the run-up to a reauthorization of the Higher Education Act. In anticipation (or perhaps in hopes of) this delay, Rep. Joe Courtney (D-CT) and 67 House Democrats introduced a bill calling for extending the current rate for two years so Congress has adequate “time to craft a thoughtful long-term solution to address this growing problem.”

Additional Information:

• Overview for President Obama’s FY2014 budget: http://www.whitehouse.gov/omb/overview

• Department of Education section of the FY2014 budget: http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/education.pdf

• Department of Education budget appendix: http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/edu.pdf

• Inside Higher Ed, “Interests Diverge on Interest Rates”: http://www.insidehighered.com/news/2013/04/10/obama-said-propose-market-based-interest-rate-student-loans

• Chronicle of Higher Education, “Calls Mount for Changing How Interest Rates Are Set on Federal Student Loans”: http://chronicle.com/article/Calls-Mount-for-Changing-How/138451/