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Using Budget Tools to Make College Affordable

President’s New Budget Puts College Within Reach of Students and Families

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Making college more affordable is necessary in order to have a vibrant middle class and a strong national economy.

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President Barack Obama’s proposed budget for fiscal year 2013 sets a responsible course for rebuilding the economy so that it works for everyone, not just the privileged few. Our middle class is the engine of economic growth, but is threatened by dwindling public investments, a tax system increasingly rigged to benefit the wealthy, a fraying safety net, and assaults on what should be the bedrock guarantees of Medicare, Medicaid, and Social Security.

The president’s budget protects those guarantees, boosts critical investments, and takes steps toward rebalancing the tax code so that all pay their fair share. And it does this in a fiscally responsible way, charting a path that nurtures the economic recovery while reducing the federal deficit, all without asking the middle class to shoulder a disproportionate share of the burden.

In his State of the Union address, President Obama stressed the close relationship between an affordable college education, a vibrant middle class, and a strong national economy. His fiscal year 2013 budget proposal reflects this emphasis as well by providing increased support for major federal student financial-aid programs.

President Obama’s budget uses a variety of tools to keep postsecondary education within reach for American families, including increased grant and work-study funding, tax credits for college tuition, and expanded access to student loans. But the president’s budget also reflects the fact that making college more affordable means reducing the cost of tuition, not just increasing financial aid. To that end, the White House proposes several policy changes that reward colleges that maintain low tuition with increased financial aid and greater access to grant funds.

Increasing affordability

The president’s budget would increase the availability of financial aid for low and middle-income families by:

  • Increasing the maximum Pell Grant from $5,550 to $5,635. Though a modest change, the added funds will keep nearly 10 million of the lowest-income college students from falling further behind on their educational expenses.
  • Increasing funding for the federal work-study program by $150 million in FY 2013, which is enough to provide work-study grants to an additional 110,000 students. These new grants would be available at colleges that provide students with job placements that are aligned with the student’s career goals and academic pursuits. The president’s long-term plan would double the number of work-study jobs over the next five years, thereby helping students find flexible employment that fits within their academic schedules rather than struggling to juggle a rigid work schedule with studies.
  • Making the American Opportunity Tax Credit permanent. This credit, worth up to $2,500 per student per year, helps middle-income families reduce the financial impact of postsecondary education on tight family budgets.

While scholarship and grant programs that put money back in students’ pockets are obviously preferable to increasing student loans, these days many families must take on debt to finance their educations. The president, therefore, proposes two changes to the federal loan programs:

  • The budget increases funding for federal Perkins loans offered by the U.S. Department of Education from $1 billion to $8.5 billion. It also alleviates the program’s burden on colleges by proposing that Perkins loans be originated and serviced by the federal government instead of the schools themselves. Colleges offer Perkins loans to their most financially needy families, and these changes would undoubtedly expand access. But that access comes at a high price—the president’s budget would increase the interest rates on Perkins loans to 6.8 percent from 5 percent.
  • The budget includes a fix to the looming July 1, 2012, increase in interest rate on federal Stafford loans to undergraduates, preventing the rate on subsidized loans from hiking to 6.8 percent from 3.4 percent for at least a year.

Reducing college tuition

Although the president’s proposed increases to financial aid are important, it is also crucial to address steep annual increases in tuition at our nation’s colleges and universities. The administration, therefore, has proposed a series of programs that would reward a school’s effort to contain costs and provide the best value to students:

  • Changes to campus-based aid programs. The president’s budget increases funding for campus-based aid programs like the Perkins loan and the federal work-study program, but it also asks them to serve double duty. The proposal changes the allocation of these campus-based aid programs as a way to create an incentive for colleges to serve more low-income students and to charge reasonable tuition rates. The budget would target funds toward colleges that serve a larger proportion of Pell-eligible students and have relatively low tuition and fees.
  • Race to the Top: College Affordability and Completion would provide $1 billion to schools that keep their postsecondary education programs affordable.
  • First in the World would provide $55 million in targeted grants to develop or replicate successful strategies for improving college-graduation rates.

As the Center for American Progress outlined in a recent policy brief, it is unlikely that a single federal policy will reverse the trend of rising college costs. That’s why it is important to attack the issue from many different angles, maintaining federal financial aid while requiring colleges to justify their tuition prices. The president’s comprehensive approach demonstrates that ensuring college affordability is one of his ongoing priorities.

Julie Margetta Morgan and Stephen Steigleder are Policy Analysts with the Postsecondary Education Program at the Center for American Progress.

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