What Obama's Budget Could Mean for Student Borrowers

Changes to Pell Grants and work-study could be coming under the proposed federal budget.

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If approved, President Obama’s proposed fiscal 2014 budget reforms will affect student loans and grants.
If approved, President Obama’s proposed fiscal 2014 budget reforms will affect student loans and grants.

President Barack Obama submitted his budget proposal for the 2014 fiscal year to Congress last week and, once again, he suggests a number of reforms that would affect grants and student loans. While all aspects of the president's proposal will remain just that – a proposal – unless and until Congress approves the budget, here's a rundown of some of his major recommendations regarding student debt.

[Find out why budgets matter to student loan borrowers.]

The president is focusing on college access, affordability and completion and the proposal fully funds Pell Grants through award year 2015-2016. Pell Grants are crucial to ensuring low-income students can access postsecondary education and the proposal would help an estimated 9.4 million students for 2014-2015 (and increase the maximum award by $140 to $5,785).

In fact, a big overall positive of the request is that it contains proposals to expand grant and work-study opportunities, which would help limit the amount of money students have to borrow in loans. In addition to funding Pell Grants, it would expand Supplemental Educational Opportunity Grants and federal work-study, aiming to double the number of work-study participants over the next few years.

Why is this a huge deal? Because the more students benefit from this aid, the less they will have to borrow in loans, which means a slightly lighter burden – and a slightly smaller barrier to success – both during and after college.

The request also includes proposals regarding student loans. It would make improvements to Income-Based Repayment, known as IBR, available to all borrowers of federal loans and also would protect any forgiveness through IBR and other income-driven plans from being taxed. Nontaxability is consistent with the crux of these plans, which are designed to help keep payments affordable for low- and moderate-income borrowers.

You may remember the popular campaign last year pressuring Congress to keep interest rates on subsidized Direct Loans from jumping from 3.4 percent to 6.8 percent. That's an issue again this year and the president's budget would prevent this doubling. That's great news for this fall's borrowers.

[Learn ways to keep student debt manageable.]

But there's a huge cost to that: the request removes the cap on interest rates. That means interest rates for future federal loans could rise substantially, making loans – and college – less affordable for students who must borrow to help pay for school.

Essentially, the president proposes to tie the interest rate on federal student loans to the 10-year Treasury note. The rate would then be fixed over the life of the loan. This has two major negatives.

First, no cap means that borrowers who attend school when interest rates are high could pay significantly more than others who borrow when rates are low. Second, fixing the rate over the life of the loan is not a permanent solution.

Many students today who must borrow with 6.8 percent interest are repaying their loans at a higher than market rate, because market interest rates have fallen dramatically in the past few years. The president's proposal wouldn't prevent this from happening again; if interest rates again drop significantly at any point in time, borrowers who went to school when rates were higher once again would be stuck repaying loans at a much higher rate than market rate.

[Read about federal financial aid changes for 2013.]

While some commenters claim interest rates don't really matter because of plans like IBR, they can make a big difference.

Lauren Asher, president of The Institute for College Access & Success (TICAS), says in a release that a difference of a little more than one point, between an interest rate of 8 percent rather than 6.8 percent, means a student repaying in IBR with a $30,000 salary (and 4 percent annual raises) who borrowed $20,000 will pay about $7,000 more. That's one-third of the original amount borrowed!

Of course, it's important to maintain low interest rates, but it's also important to keep student loans affordable for all students. The president wants to focus on affordability, access and completion – and affordability is a major factor in access and success. The Student Loan Ranger encourages you to read the proposals set forth by TICAS in a recent white paper to simplify student loans, keep them affordable and target benefits and relief like IBR to those most in need.

And to learn how to navigate your way through current options, download our e-book, "Take Control of Your Future," from the Kindle Store.

Radhika Singh Miller is a program manager for Educational Debt Relief and Outreach at Equal Justice Works. In 2008, she served on the Student Loans Team in the Negotiated Rulemaking for the College Cost Reduction and Access Act (CCRAA) and has extensive knowledge of this landmark legislation. She conducts educational webinars and presentations; advises schools and organizations; and advocates for legislation and policy. Prior to joining Equal Justice Works, Miller was a staff attorney at the Partnership for Civil Justice in Washington. She received her J.D. from Loyola Law School Los Angeles.