Obama’s 2014 Budget Request Reforms Student Loan Interest Rates, Makes College Affordability a Priority

President Obama’s fiscal year (FY) 2014 budget request to Congress includes a maximum Pell Grant award of $5,785 for the 2014-15 award year, modifies student loan interest rate policy by making rates market-based, and would make some campus-based aid funds contingent on an institution’s ability to keep tuition low, provide good value, and graduate Pell-eligible students.

“The 2014 budget includes a combination of discretionary and mandatory funding that would make available $155 billion in new grants, loans, and work-study assistance—an increase of more than $57 billion, or 59 percent, over the amount available 2008—to help nearly 14.7 million students and their families pay for college,” according to a summary of the budget request issued by the U.S. Department of Education. 

Regarding student aid and higher education, Obama’s budget requests Congress to:

Federal Loans 

  • Restructure federal student loan interest rates so they are determined by the cost of government borrowing and are therefore more closely aligned with market rates.  Specifically, rates would be constructed by using the base 10-year Treasury note rate (“T-bill”) plus add-ons of:
    • .93 percentage points for Subsidized Stafford Loans
    • 2.93 percentage points for Unsubsidized Stafford Loans
    • 3.93 percentage points for PLUS Loans (Grad PLUS & Parent PLUS)

If those rates were in place currently it would be more favorable for students than the existing fixed rate policy, at least in the current years. Subsidized Stafford Loans would have an estimated 2.9 percent rate, Unsubsidized Stafford Loans a 4.9 percent rate, and a 5.9 percent rate for PLUS loans. The proposal calls for interest rates to be determined annually and then fixed for the life of loan, mirroring the variable-fixed approach NASFAA has supported and advocated for since last year. The president’s budget request does not place a cap on interest rates.

  • Expand the current Pay As You Earn (PAYE) repayment plan to all student borrowers, past, present and future.  PAYE, a form of Income Contingent Repayment (ICR) currently available to only a certain pool of borrowers, ensures that their loan payments do not exceed 10 percent of their discretionary income and provides loan forgiveness after 20 years. Under the president’s budget, PAYE would extend to all student borrowers beginning July 1, 2014.
  • Change guaranty agency compensation for rehabilitating defaulted loans by eliminating their current retention share of the original defaulted student loan amount, and reducing to 16 percent the fee they can charge to a borrower on outstanding balances. If a guaranty agency is unable to locate a private sector lender willing to purchase the rehabilitated loan, the guaranty agency will send the loan to the Department of Education and the guarantee agency would continue to earn a 16 percent collection fee. The administration estimates that this would save $3.7 billion over 10 years to be invested in the Pell Grant program.


  • Maintain a maximum Pell Grant of $5,785 for award year 2014-15. This amount takes into the account the scheduled Consumer Price Index (CPI) increase in mandatory funds.
  • Replace TEACH Grant with a new Presidential Teaching Fellows program that would provide formula grants to states to fund scholarships for students attending “high-performing” teacher preparation programs.  Students would receive scholarships of up to $10,000 in the final year of their teacher preparation program.

Campus-Based Aid 

  • Provide $150 million more in funds to the Federal Work Study (FWS) program in order to double the number of participants in the next five years.
  • Expand the Perkins Loan Program from $1 billion to $8.5 billion per fiscal year. The proposal would make Perkins unsubsidized with the same interest rate as the Unsubsidized Stafford Loan. The White House estimates that the increased funding would allow 2,700 additional postsecondary institutions to participate in the program and the savings would be reinvested in the Pell Grant program.
  • Reform federal campus-based aid programs (specifically Federal Work Study and the Supplemental Educational Opportunity Grant) to reward colleges who keep their tuition and tuition increases low, enroll and graduate high numbers of Pell-eligible students, and provide good value.  The budget does not include specifics about how these metrics would be defined.

Access and Affordability Proposals 

  • Create incentives for states and colleges, mirrored after the K-12 Race to the Top initiative, to keep costs under control through a $1 billion investment in a new challenge to states to spur higher education reform focused on affordability and improved outcomes across states and universities.
  • Provide $260 million for the Fund for the Improvement of Postsecondary Education (FIPSE). FIPSE funds support competitive grants to explore projects that are models for innovative reform in higher education and that support K-12 through higher education pipeline initiatives. 

In addition, the budget does not reflect sequestration cuts as it assumes the replacement of the sequester through a series of increases to revenue and spending cuts.

"Financial aid administrators applaud the President's efforts to make college accessible and affordable, particularly through the continued strong support given to the Pell Grant program," said NASFAA President Justin Draeger. "We are also heartened to see bipartisan support for finding a permanent, sustainable solution to federal student loan interest rates that would also stop the subsidized Stafford loan from doubling to 6.8 percent this July. Last month, we testified to Congress that all federal student loan interest rates should be market-based, variable, sustainable and avoid the one-year expensive fixes that have created confusion for students and parents. The President’s interest rate proposal accomplishes those goals and deserves consideration.  We look forward to working with the Administration and Congress to find a viable path forward on interest rates before July 1.”  

"We embrace the concept of shared accountability and responsibility in keeping the costs of college down and helping students succeed, and believe it must be done in a way that does not impede institutional freedom or unfairly penalize schools that serve diverse student populations,” Draeger said. “NASFAA's recent policy considerations put forward as part of the Bill and Melinda Gates Foundation's Reimagining Aid Design and Delivery outlined how a portion of campus-based funding could be used to incentivize schools to create environments that foster better-than-predicted student outcomes. NASFAA will continue to work with the Administration and Congress to ensure no qualified student is denied access to and success in higher education."

It is important to remember that the release of the president’s budget is just one step of the budget process. Both the House and Senate have also put forth FY 2014 budget proposals. The White House, Senate, and House proposals will now be considered and debated through the appropriations process—a process which typically alters, sometimes significantly, original proposals. Stay tuned to Today’s News for the latest budget updates.


Publication Date: 4/11/2013

Gail S | 7/22/2013 3:31:13 PM

"Expand the Perkins Loan Program from $1 billion to $8.5 billion per fiscal year. The proposal would make Perkins unsubsidized with the same interest rate as the Unsubsidized Stafford Loan."
This proposal is so silly. Unless there is a valid reason for having several loan programs, I'd like to see one loan program for students as proposed by Rick Shipman from Michigan State University.

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