Budget Proposals, Interest Rates, and Student Aid

by Viveka P. Kudaligama / Apr 15, 2013

Last Wednesday, President Obama released the Fiscal Year 2014 budget proposal that includes several policy proposals relevant to higher education. While these proposals may not be a surprise, they offer an opportunity to consider the broader context of higher education funding. In keeping with the President’s college completion agenda, the budget proposals that incentivize affordability and attainment include a Higher Education Race to the Top (RTTT) Competition, a First in the World fund that focuses on “the development, validation, and scaling-up of cutting-edge innovations…,” as well as reforms to campus-based funding programs such as the Federal Supplemental Educational Opportunity Grant, Federal Work Study, and Pell grants.

There is also a proposal to infuse $8 billion to the Department of Labor (DOL) budget for a Community College to Career Fund (CCCF). CCCF, jointly administered with the Department of Education, will continue the mission of the Trade Adjustment Assistance Community College and Career Training (TAACCCT) grant program. President Obama’s budget proposal request specifies that, with two more rounds of TAACCCT grants through 2014 (half of the $2 Billion TAACCCT funds have already awarded), the establishment of CCCF is important to continuing program innovations at community colleges. The CCCF proposal is of added relevance to ongoing research at OCCRL as our office currently serves as the third-party evaluator for two national TAACCCT grant consortia, the Health Professions Pathways (H2P) and the National Information, Security, and Geospatial Technology Consortium (NISGTC). CCCF aims “to support State and community college partnerships with businesses to build the skills of American workers.” An important focus of OCCRL evaluation examines the role and importance of business partners in the community college setting.

Whereas the focus on TAACCCT and community colleges is an important feature of the President’s budget proposal, an arguably even more significant focus is on reform to student aid. Specifically, President Obama’s budget proposal proposes “a cost-neutral reform to set interest rates so they more closely follow market rates.” The proposal also caps loan repayment at 10% of discretionary income. This shift to a market-based rate is a significant change from the current policy wherein student loan rates are determined by Congress. The interest rate on subsidized Stafford Loans is scheduled to increase from 3.4% to 8.6% later this summer, unless Congress decides to hold back the increase. The President’s budget proposal anticipates that the transition to market-based interest rates will benefit students by removing the uncertainties associated with variable interest rates.  For the government, in the current slow economy with low interest rates, this plan will be a financial loss. The long-term outlook is that the shift will reduce the impact of student loans on the federal budget, as the economy rebounds and interest rates recover. However, the proposal is facing criticism by student groups for its lack of a cap on interest rates.

Many of these budget proposals have been preempted by the grantees of the Bill & Melinda Gates Reimagining Aid Design and Delivery program. For example, the New America Foundation proposed pegging the interest rate to the 10-year Treasury note. Incidentally, the New America Foundation was one of the groups that presented at the U.S. House of Representatives’ education committee meeting in March. Several of the Gates grantees also proposed income-based repayment options. In addition, various mechanisms of linking federal aid to attainment and loan repayment accountability measures were common across many of the Reimagining Aid Design and Delivery proposals.

In the days to come, we will come to know which of the President’s budget proposals will have enough political traction in Washington, DC. Until we get to that point, we are interested in hearing your thoughts!