President Obama Focuses on Access, Affordability, Simplification In FY 2016 Budget Request
By NASFAA Policy & Federal Relations Staff
President Obama’s fiscal year (FY) 2016 budget request to Congress proposes a maximum Pell Grant award of $5,915 for the 2016-17 award year, reforms the higher education tax system, and touts the two-years’ free community college proposal announced earlier this year.
Broadly, the $4 trillion budget would end sequestration and serve as a blueprint for what the administration has called “middle class economics.” According to a fact sheet released by the White House, “The President’s 2016 Budget is designed to bring middle class economics into the 21st Century. This Budget shows what we can do if we invest in America’s future and commit to an economy that rewards hard work, generates rising incomes, and allows everyone to share in the prosperity of growing America.” As has been the case with Obama’s previous budget requests, there is a strong focus on college access and affordability.
Regarding student aid and higher education, Obama’s budget requests Congress to:
- Maintain discretionary Pell Grant funding at current levels, which would lead to a maximum Pell Grant of $5,915 for award year 2016-17. This amount takes into account the scheduled Consumer Price Index (CPI) increase in mandatory funds.
- Allowing students enrolled in eligible career pathways programs, who were granted only partial Pell Grant eligibility in the omnibus spending bill passed in December 2014, to get the maximum Pell Grant award.
- Strengthen Pell Grant academic progress requirements to encourage on-time completion, while also limiting the receipt of additional Pell disbursements by students who repeatedly enroll in postsecondary programs and obtain aid but do not earn any academic credits.
- Continue to index Pell Grants to inflation after 2017, in order to ensure that the maximum Pell award keeps up with inflation, at a cost of $30 billion over 10 years which is paid for with savings from the proposed reformed and expanded Perkins Loan program and the proposed streamlining of income-based repayment plans.
- Move Iraq and Afghanistan Service Grants to the Pell Grant program to avoid further award reductions as a result of sequestration and ensure that eligible students receive the full, non-sequestered Pell Grant award for which they are eligible.
- Level-fund both the Federal Supplemental Educational Opportunity Grant (FSEOG) and the Federal Work-Study (FWS) programs at the FY15 amount of $733 million and $990 million, respectively. As in the past, the budget request also seeks to revise the allocation formulas to direct dollars toward institutions that enroll and graduate higher numbers of Pell-eligible students and have a “demonstrated commitment to providing their students a high-quality education at a reasonable price.”
- Expand the Federal Perkins Loan Program from $1 billion to $8.5 billion per fiscal year. The proposal would make Perkins Loans unsubsidized with the same interest rate as the Unsubsidized Stafford Loan and schools would continue to have some awarding discretion. The White House estimates that the increased funding would allow 2,700 additional postsecondary institutions to participate in the program and the “savings” (i.e. earnings from the unsubsidized loans) would be reinvested in the Pell Grant program.
- Expand Pay As You Earn (PAYE) to all student borrowers and simplify income-driven repayment by making PAYE the only income-driven repayment plan for new borrowers on or after July 1, 2016. Additionally, PAYE terms would be modified to ensure that the program is well-targeted:
- Using total household income for all married couples when calculating income-driven monthly payments.
- Extending the PAYE repayment term to 25 years before forgiveness for borrowers with federal student loan debt that is greater than the aggregate, independent, undergraduate loan limit (currently $57,500).
- Eliminating the current payment cap that limits monthly payments to the monthly payment under 10-year standard repayment based on original loan balance.
- Capping the amount of interest that can accrue when a borrower’s monthly payment is insufficient to cover the interest to avoid ballooning loan balances.
- Capping the amount forgiven under the Public Service Loan Forgiveness (PSLF) Program to the aggregate, independent undergraduate loan limit (currently $57,500) for all borrowers.
- Limiting qualifying payments for PSLF to payments made in an income-driven repayment plan (i.e., no payments made while in the 10-year standard repayment plan would count).
- Increase the amount of money spent on loan servicing to $855 million, up from $772 in FY15.
- Consolidate existing tax credits, such as the Lifetime Learning Tax Credit and tuition and fees deduction into a permanent American Opportunity Tax Credit (AOTC), offering students up to $2,500 per year. The AOTC, as currently structured, is available for up to four years and set to expire in 2017. This proposal would make it permanent for qualified educational expenses for eligible students.
- Increase the refundable portion of the AOTC to $1,500. The current maximum refundable amount is $1,000, or 40 percent of the maximum credit, and the president’s plan would increase this to a flat rate of $1,500.
- Expand AOTC eligibility to non-traditional students. Currently the AOTC is only available for students who are at least half-time, and only up to four years. Under the new proposal, part-time students would be eligible for an AOTC of up to $1,250 (with $750 of that being refundable), and eligible students could claim the credit for up to five years.
- Simplify the AOTC process for Pell Grant recipients. The proposal would exempt Pell Grants from taxation and from the AOTC eligibility calculation. This would make it easier for Pell Grant students to claim their tax credits.
- Eliminate tax on loan forgiveness from income-driven repayment plans. Currently under Pay As You Earn (PAYE) and other income-based repayment plans, the amount forgiven at the end of the repayment period is taxable. The president’s proposal would exempt income-based student loan forgiveness from taxation.
- Repeal the current student loan interest deduction (SLID) for new borrowers. Citing the confusing nature of SLID and minimal assistance for most borrowers, the president is proposing repealing SLID for new borrowers and instead providing them relief through income-based repayment and more generous AOTC.
Access and Affordability Proposals
- Develop America’s College Promise, a proposal to make two-years of community college free for “responsible” students. The proposal, designed to be a federal-state partnership, would have the federal government cover three quarters of the average cost of community college, with states expected to contribute the remaining amount of outstanding tuition. The program would eliminate tuition and fees for all eligible students for a maximum of four years and would require that eligible students maintain a 2.5 GPA. Students and families with adjusted gross incomes (AGI) $200,000 and above would not be eligible. The plan is expected to cost $60 billion over 10 years and the president plans to pay for it through his proposed tax reform.
- Create College Opportunity Bonus program that would provide $7 billion over 10 years to schools that enroll and graduate low-income students on time. Funds would be given directly to the institution to expand need-based aid, enhance student support, or employ other best practices to help low-income students succeed. The total annual bonus amount an institution could receive would be calculated based on the number of on-time Pell graduates at the institution multiplied by a tiered bonus amount: $1,000 at four-year schools; $700 at two-year schools; and $350 for less-than-two-year schools. The school’s cohort default rate and graduation rate would also be considered in determining eligibility.
- Dramatically reduce the number of questions on the Free Application for Federal Student Aid (FAFSA) by eliminating questions related to “assets, non-IRS untaxed income, non-IRS income exclusions, and other income adjustments.” “Non-IRS” income and exclusions refers to data elements that cannot be verified using the IRS Data Retrieval Tool (DRT). The questions being targeted for elimination are those considered to be confusing for students and families. To guard against any Pell award decreases, these changes are offset by a reduction of $600 in Expected Family Contributions (EFC). The budget does not further explain the rationale or operational details of the $600 EFC decrease.
- Include other federal student aid programs, such as the Department of Defense Tuition Assistance and GI Bill Benefits, in the 90 percent portion of the 90/10 calculation.
The House Committee on Education and the Workforce put out a statement in which Chairman John Kline (R-MN) was unconvinced by the president’s budget request, saying “the American people deserve better. We need to do better. We must provide employers certainty and flexibility so they can grow their businesses, create jobs, and give workers the raise they’ve earned. We must help more students pursue the dream of a college degree without living a nightmare of debt and unemployment.”
Kline went on to add, “Far too many students are trapped in failing schools, and workers are struggling to pay the bills and provide for their families. While the president has missed another opportunity to unite us as a country and begin tackling these tough challenges, Congress will move forward with commonsense reforms that will help make a difference in the lives of students, workers, teachers, and job creators. That is what the American people expect, and that is precisely what Congress will aim to do.”
In a statement released yesterday, NASFAA President Justin Draeger praised the president for his commitment to making the student aid programs a priority in his budget. “As the economy continues to improve and more Americans return to work, I’m encouraged to see President Obama continuing to invest in the federal aid programs that help students attain the education and credentials they need to secure well-paying jobs,” Draeger said. “These programs aim to ensure that our nation has the skilled workforce necessary to compete in today’s global market.”
Congress is unlikely to accept many of the proposals put forward by the administration, and will likely move forward in the budget and appropriations processes with their own ideas and agendas. According to budget rules, both the House and Senate are to pass a Budget Resolution, serving as a framework for their respective budget priorities. While this step does not always occur, the discussion in the months ahead on the Hill will focus on funding and spending.
To better understand and navigate the process through which the federal student aid programs are funded each year, start by viewing NASFAA's interactive Federal Budget Process flowchart.
Publication Date: 2/3/2015