Obama’s Budget Would Increase Pell Grants and Add Incentives on Some Student-Aid Money

In his long-awaited budget for the 2014 fiscal year, released on Wednesday, President Obama asks Congress to increase the maximum Pell Grant by $140, to $5,785, and spend $8-billion on job-training programs at community colleges.

The spending plan, which comes roughly three weeks after the U.S. Senate and House of Representatives passed budgets outlining their own priorities, repeats the president’s call to expand and remake the Perkins Loan program, an idea he first offered in 2009. It would raise spending on Federal Work-Study by $150-million, doubling the number of recipients over five years, but would provide no increase for Supplemental Educational Opportunity Grants.

Minority-serving institutions would receive level funds, as would the TRIO and Gear Up college-preparatory programs.

Typically, the president releases his budget in February, shortly after his State of the Union address, and the House and Senate follow suit. The White House has blamed this year’s delay on uncertainty created by sequestration, which cut billions from the current year’s budget and will slash $1.2-trillion over the next decade unless Congress intervenes.

The president’s budget for the 2014 fiscal year, which starts on October 1, does not reflect sequestration cuts for that year because Mr. Obama would replace the automatic across-the-board cuts with more targeted reductions.

Like the president’s last two budgets, the blueprint for 2014 would provide $1-billion for “Race to the Top"-style grants to states and millions more for a “First in the World” innovation competition for nonprofit organizations and colleges. It would also replace the Teach Grant program with a Presidential Teaching Fellows grant program for the states, an idea that Mr. Obama first floated in 2011.

None of those programs has received funds to date, largely because of budget constraints. Community colleges have received $2-billion of the $12-billion that the president first sought for them in 2009.

Under the president’s perennial Perkins Loan proposal, the program would grow from $1-billion to $8.5-billion. Some of the additional aid would go to colleges that kept tuition down, provided “good value,” and served low-income students effectively. The 2014 budget would extend those incentives to the Work-Study program.

Wrestling Over Rates

New this year is a proposal to peg student-loan interest rates to U.S. Treasury securities, an idea that’s popular with Republicans in both chambers of Congress. Under the president’s plan, students with subsidized Stafford loans would be charged a rate equal to the 10-year Treasury note—currently 1.75 percent—plus 0.93 percentage points. Students with unsubsidized Stafford loans would pay an additional two percentage points, while parents and graduate students with PLUS loans would pay three percentage points more. Interest rates would be set annually and fixed for the duration of each loan.

The plan is similar to a bill, introduced by Senate Republicans on Tuesday, that would set the rate on all newly issued loans at the rate on 10-year Treasury notes plus three percentage points, though the president’s proposal is significantly more generous to borrowers with subsidized loans, and slightly less generous to parents and graduate students.

Neither plan would provide an interest-rate cap—a safeguard student-advocacy groups are insisting on. In a statement issued on Wednesday, several groups warned that the plan “risks spiking the cost of college for future generations.”

Responding to that concern, Carmel Martin, the Education Department’s assistant secretary for the Office of Planning, Evaluation, and Policy Development, told reporters that a cap would force the government to charge current students more, as a “hedge” against rising rates.

Instead, the administration is proposing to expand its “Pay as You Go” income-based plan to all borrowers, so no one would have to pay more than 10 percent of his or her discretionary income, and borrowers could have their remaining debt forgiven after 20 years of repayment. Currently, only borrowers who had no outstanding loans as of October 1, 2007, and who took out a direct loan after October 1, 2011, are eligible for the program.

Under Mr. Obama’s plan, a subsidized loan made today would carry a rate of 2.7 percent, and an unsubsidized loan would carry a rate of 4.7 percent. Both rates are cheaper than the current rates of 3.4 percent and 6.8 percent, respectively, which were set by Congress several years ago. Barring Congressional action, the rate on subsidized loans is scheduled to double, to 6.8 percent, on July 1.

The budget also fleshes out a plan, announced in the president’s State of the Union address, to provide grants to states that team up with employers and colleges to “better equip graduates for the demands of a high-tech economy,” including $300-million for a “High School Redesign Program.” The program would award grants to school districts that form partnerships with postsecondary institutions, businesses, and nonprofit organizations to help ensure that all students graduate from high school with college credit and “career-related experiences,” such as internships.

It would provide $67-million to study the student-aid system and test new ways of awarding aid, such as through dual-enrollment programs.

The House and Senate budget blueprints differ on several proposals affecting student aid. The Senate plan calls for maintaining scheduled increases in the Pell Grant, while the House proposes a 10-year freeze, coupled with tighter eligibility rules. The House would allow interest rates on subsidized loans to double, while the Senate would extend the 3.4-percent rate indefinitely.