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President to President
Molly Corbett Broad's weekly email newsletter to higher education leaders.

President to President: Obama's FY 2014 Budget Proposes Changes to Federal Student Loans

Vol. 14, No. 11

  • Obama's FY 2014 Budget Proposes Changes to Federal Student Loans, Increases Research Funding
  • ACE's Terry Hartle Speaks at House Ways and Means Tax Reform Working Group
  • Army, Air Force Reinstate Tuition Assistance Program
  • House Hearing on Bill to Grant In-state Tuition Rates for Veterans

President Obama released his long-awaited budget proposal for FY 2014 Wednesday, and we were pleased to see the emphasis it places on research funding and student financial assistance and, in particular, that it proposes to restore almost all the funding eliminated under sequestration, which began March 1.

The $3.77 trillion plan provides $71.2 billion in discretionary funding for the Department of Education, which is 4.6 percent above what Congress approved spending in 2012. (FY 2013 funding levels were not finalized when the budget was prepared, so the FY 2014 budget compares proposed spending levels to FY 2012.)

The most highly publicized element of the proposal is a plan to move to a market-based interest rate on all federal student loans. If you'll remember, the interest rate on subsidized Stafford student loans is set to double to 6.8 percent July 1 if no action is taken. Variable rate student loans are not new in federal policy: Between 1992 and 2006, interest rates were reset every year based on the 91-day Treasury bill rate and students paid that rate when repayment began. Since 2007, interest rates have been fixed in law and have not varied with economic conditions.

Under the president's proposal, rates on new subsidized Stafford, unsubsidized Stafford and PLUS loans would be set each year based on the 10-year Treasury bill rate plus a fixed percentage, which would be locked in for the life of the loan. However, in a change from previous variable rate policy, the administration would not set a cap on how high the rates could rise. The absence of a cap is likely to prove controversial.

While we are still examining all the implications of this proposal, it is clear students are likely to pay more in the long term.

This is the first proposal offered by the Obama administration in what will be a key area of policy debate over the next few months, and we look forward to working with the White House and Congress to develop a plan to reform the loan programs that will keep borrowing as affordable as possible.

In good news for student borrowers, the president's budget also would expand the Income-Based Repayment program, which the administration has dubbed the "Pay As You Earn" plan. This plan makes student loan repayments a percentage of a borrower's income, rather than a fixed amount, and allows for loan forgiveness after 20 years. The intent is to reduce the debt burden on low-income borrowers.

On the research front, the president's budget proposes an overall 9 percent increase in non-defense R&D funding, reversing the cuts imposed by sequestration. The budget requests a total funding level of $31.3 billion for the National Institutes of Health, which would provide 1.5 percent more than was available in FY 2012. For the National Science Foundation (NSF), the increase was even larger. The budget requests $7.6 billion for NSF, a boost of 8.4 percent over FY 2012.

Other provisions in the president's proposal include:

  • An increase in the maximum Pell Grant award to $5,780 in FY 2014. The program itself would be ensured full funding through the 2015-16 academic year.
  • Level funding for the Supplemental Educational Opportunity Grants, TRIO and GEAR UP programs.
  • A Race to the Top for higher education, which would provide $1 billion to support competitive grants to states that "commit to driving comprehensive change in their higher education policies and practices."
  • A $150 million increase to the Federal Work-Study (FWS) Program, as part of a proposal to ultimately double FWS funding over the next five years. The increase is one component of an effort by the administration to significantly change the current campus-based aid programs (FWS, Supplemental Opportunity Education Grants and Perkins Loans).
  • A request for $8 billion in new funding for community colleges to better integrate their programs with workforce needs.
  • A renewed call to limit the value of deductions for charitable contributions, an effort we have long opposed.

It is important to remember that the president's budget proposal is simply a request. It has no binding authority on Congress and is best understood as a detailed statement by the administration of its fiscal goals and policy preferences.

ACE Senior Vice President Terry Hartle testified Tuesday before the House Ways and Means Committee's Education and Family Benefits Tax Reform Working Group, telling lawmakers that the higher education community strongly supports the existing framework of major federal higher education tax provisions.

Terry was among a group of higher education association representatives, campus officials, administrators and faculty to address the working group, which is seeking institutional perspectives on education tax provisions such as the American Opportunity Tax Credit, the Lifetime Learning Credit, the Above-the-Line Tax Deduction and the Student Loan Interest Deduction, as well as Section 529 College Savings Plans and Coverdell Education Savings Accounts. He stressed that together these provisions function like a "three-legged stool" focused on the important goals of encouraging saving for higher education, helping students and families pay for college and assisting with the repayment of student loans. 

Noting that the House Ways and Means Committee will have a major role in sustaining and enhancing this framework, Terry also emphasized to the working group that we have long supported legislative efforts to consolidate and simplify these tax provisions in order to encourage more students and families to take advantage of their benefits and maximize their impact.

Finally, Terry reminded the lawmakers that there is no factual basis for alleging there is a link between federal student financial aid and rising tuition.

The Army and Air Force have reopened their Tuition Assistance (TA) programs to service members following a congressional mandate in last month's FY 2013 continuing resolution.

Sequestration had blocked all money that is normally used by troops to help pay for college classes in order to further their educations and their military careers. In most branches, that tab reaches $4,500 per year for each service member who takes classes.

On March 21, Congress voted to order the Defense Department to locate the necessary funding to relaunch the TA programs across all branches of the military. That directive has now become law.

The Marine Corps has said it will resume its TA program as well, but at reduced funding levels. Details on the new rates have not yet been released.

The House Committee on Veterans' Affairs Subcommittee on Economic Opportunity held a hearing Wednesday on numerous pending and draft bills related to in-state tuition rates for veterans, the Transition Assistance Programs (TAP), the Department of Veterans Affairs work-study program and other bills.

The primary focus of the hearing was H.R. 357, a bill that would require schools eligible for GI Bill education benefits to give veterans in-state tuition rates regardless of residency status. While we support the goal of this measure, we are concerned about how it might affect individual states—the decision-making processes of establishing state tuition policies are widely varied.

In the vast majority of states, public institutions do not have tuition-setting authority and so the state legislature would need to change the law in order for institutions to comply with the bill. In other states, veterans already receive in-state rates at any public institution. For active duty service members, their spouses and dependents, the 2008 Higher Education Opportunity Act already requires public institutions to provide in-state tuition rates.

Among the panelists testifying on behalf of the higher education community were Susan Aldridge, senior fellow at the American Association of State Colleges and Universities; Col. G. Michael Denning (USMC) Ret., director of Graduate Military Programs at the University of Kansas (on behalf of the Association of Public and Land-grant Universities); and Lt. Gen. Joseph F. Weber (USMC) Ret., vice president for Student Affairs at Texas A&M University.

Molly Corbett Broad
President of ACE