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The Details On Obama's Higher Education Budget

Mark Huelsman

The annual release of the president’s budget has come to resemble college basketball’s March Madness selection show over the years, with policy wonks eagerly tuning in to see whether or not their favorite policy has “made the tournament.”

The document itself is always long on aspirations and short on details, and nearly all of it would require action by Congress to become more than just ink on paper. That is to say, it’s more of a philosophical exercise than anything, but it is helpful in signaling what an administration sees as its end game on spending and tax priorities.

For higher education and student debt, this year’s budget mostly includes proposals we’ve seen from the Obama administration in previous budgets, speeches, or elsewhere. Here are a few highlights:

Makes the American Opportunity Tax Credit (AOTC) permanent. Of all the ways the federal government provides financial aid to students through the tax code, the AOTC is by far the best at targeting aid at students who need it. The AOTC is a $2,500 credit to offset college expenses, and it is partially refundable (up to 40 percent) which allows low-income families to at least take some advantage of the program. There are many ways the AOTC could be improved. Namely, it could be made fully refundable and could be provided to students when tuition bills are due, not when they file their taxes much later, and it could be targeted such that 25 percent of all benefits don’t go to families making more than $100,000. But unlike other programs, such as the tuition and fees deduction, the AOTC does provide some relief to middle-class households feeling the squeeze of college costs.

Targets Pay As You Earn benefits away from high-income, high debt borrowers: A few years ago, the administration tweaked income-based repayment to provide more generous terms for student loan borrowers. Currently, federal borrowers enrolled in the new Pay As You Earn (PAYE) plan have minimum monthly loan payments based on 10 percent of their discretionary income (that is, income above a poverty exemption), and all loan balances that exist after 20 years of consecutive payments are forgiven. While much more generous, a few features of PAYE made it regressive.

First, even though payments are always based on income, a borrower’s payments could never exceed what he or she would pay under a 10-year repayment plan. This makes it so that very high earners (think lawyers and doctors with large graduate school debts) can end up paying far less as a percentage of income than 10 percent, increasing the odds that they will receive loan forgiveness. The administration’s budget, quietly, proposes to eliminate that cap so that high-income borrowers shoulder the same burden of monthly payments as low-income borrowers (for more, see New America’s recap here). Similarly, the budget proposes to extend the forgiveness term of those with debt larger than $57,500—the current limit someone can borrow for undergraduate education—from 20 to 25 years. This, obviously, would mean that high-earners with graduate degrees would be less likely to have loans forgiven. 

Makes loan forgiveness tax-free. Currently, borrowers who do receive loan forgiveness can end up being hit with a monstrous bill, since that forgiveness counts as taxable income. The administration would exempt loan forgiveness from taxation, thus preventing a tax bill from negating the whole point of loan forgiveness in the first place.

Proposes $4 billion over 4 years for a “State Higher Education Performance Fund.” This fund, which is a repurposing of a proposal to create a Race to the Top for higher education, would give incentives to states to improve access, affordability, and completion in public colleges and universities. States would match federal money dollar-for-dollar, meaning the total benefit to students could wind up at $8 billion over four years. While $4 billion in federal money is nothing to shake a stick it, any incentive fund focused on college affordability is going to have to swim upstream a bit. As Demos and others have shown, the primary driver of the college affordability crisis is the deep and unrelenting cuts in state appropriations for higher education; reversing this is the North Star for making college more affordable. The $4 billion total in proposed incentives is about 5 percent of what states spent on higher education last year, though there’s enough evidence (from Department of Education programs such as LEAP or the College Access Challenge Grant) that even small sums of money may drive state and institutional behavior in positive directions.

Provides $647 million for “College Opportunity and Graduation Bonuses.” The Obama administration has made no secret about its desire for institutions to improve graduation rates, particularly for low-income students. They’ve attempted to tackle this issue a few ways. The most recent (and most public) has been to propose a ratings system for colleges that would measure them on various metrics related to access, affordability, and outcomes (including completion but also perhaps how graduates fare in the labor market). The idea is that institutions will recalibrate their missions to enroll and graduate more low-income students, and that some sort of market-based accountability (though they have proposed to tie eligibility for federal aid to the ratings by 2018) will drive students away from institutions who have failed to provide value. The other strategy has been to highlight bright spots and toss incentive funding their way. Like the state performance fund, these “bonuses” would be in the form of an annual grant to eligible institutions based on their number of on-time graduates that receive Pell Grants.

There are no new proposals to increase the Pell Grant or student aid beyond what the administration has already done (and even the AOTC proposal isn’t an expansion), and consensus seems to be that outside of the eventual ratings system, there’s unlikely to be a huge new higher education-related plan initiated by this White House. For that, we should look to Congress, which has an opportunity to provide real stakes for schools and real incentives for states to reverse the trend of near-universal student loan debt.

With this budget proposal, the administration is attempting to do its part in redirecting federal subsidies two ways: toward relief for undergraduate borrowers who struggle to pay off loans; and toward states and institutions who commit to reinvesting in public higher education.