Declining state funding has also been one of the main causes of soaring college costs, which have increased by more than 250 percent during the last 30 years. Several states, including Tennessee, Indiana and Ohio, already allocate state funds to colleges based on performance measures.
Obama said he would encourage states to reshape their financial aid funding models through a $1 billion Race to the Top for Higher Education that would push states to maintain funding for public higher education.
"Over the past few years, states have been cutting back on their higher education budgets ... the fact is, we've been spending more money on prisons, less money on college," Obama said. "Meanwhile, not enough colleges have been working to figure out how do we control costs, how do we cut back on costs. All this sticks it to students, sticks it to families, but also taxpayers end up paying a bigger price."
To get students through college quickly and at a low cost, Obama also said his administration would push colleges to adopt different educational frameworks, such as accelerated or competency-based degrees, massive open online courses (MOOCs) or "hybrid" classes that split class time between online and in-person instruction.
Institutions such as Western Governors University and Southern New Hampshire University, for example, have competency-based degree programs that evaluate students "based on demonstrated learning, rather than the amount of time they spend in class," said James Kvaal, deputy director of the White House Domestic Policy Council.
The last leg of Obama's proposal seeks to keep college costs low for current and future students by making all federal loan borrowers eligible for the Pay As You Earn repayment option, which caps monthly student loan payments at 10 percent of a borrower's income.
Currently, students who borrowed before 2008 or have not borrowed since 2011 are not eligible for this plan. The average student graduates with more than $27,000 in debt, according to the Institute for College Access and Success.
"At a time when a higher education has never been more important, or more expensive, too many students are facing a choice they should never have to make," between not attending college, or pursuing a degree and gathering a large amount of debt, Obama said. "They've got this crushing debt that is crippling their sense of self-reliance and their dreams."
"This country is only going to be as strong as its next generation," Obama added. "I have confidence that our nation's colleges and universities will step up ... and lead the way to do the right thing for students."