Even though I know that it has no chance of being passed in anything resembling its current form, I am excited to get my hands on President Obama’s long-delayed budget for Fiscal Year 2014 (short version, long version, six-page summary of the education portion). The funding request for the Department of Education is for $71.2 billion in discretionary spending, 4.6% higher than this year’s (pre-sequester) budget; ED is unlikely to see an increase of greater than inflation this year given the current political climate.
I tweeted my way (follow me!) through some of the key points relating to higher education yesterday, and am now back with a more detailed summary of the budget. (I also recommend Libby Nelson’s excellent summary in today’s Inside Higher Ed.)This year’s theme is “something old, something new,” as many of the proposals are recycled from last year—but with one key difference that will affect millions of students.
First of all, not much changes with respect to the Pell Grant. The President proposes a $140 increase in the maximum Pell Grant to $5,785, while the program is on more solid financial footing for the next few years. He is again trying to get a higher education version of Race to the Top passed this year, which will look similar to the plan from last year. Again, there is a strong focus in the STEM fields and for program evaluation (the latter of which is welcome from my perspective). The biggest program boost I could find was to FIPSE (the Fund for the Improvement of Postsecondary Education), going from under $2.4 million to $260 million. Although it is unlikely to be adopted, it does show a commitment to demonstration projects in K-12 and higher education.
The most controversial part of the President’s budget is the proposed shift to market-based interest rates. A day after Republican Senators Coburn, Burr, and Alexander introduced a bill to tie all interest rates to the ten-year Treasury rate (currently 1.8%) plus three percentage points, the President’s budget also proposed tying interest rates to the same measure. His plan is more nuanced, with different loans having different premiums over the Treasury rate (see p. 344-350):
Subsidized Stafford: Treasury plus 0.93% (about 2.75% currently)
Unsubsidized Stafford and Perkins: Treasury plus 2.93% (about 4.75%)
PLUS: Treasury plus 3.93% (about 5.75%)
GOP plan: All loans are Treasury plus 3% (about 4.8%)
These rates are far lower than the current rates (3.4% for subsidized Stafford, 6.8% for unsubsidized Stafford, and over 8% for graduate unsubsidized loans), but do shift risk onto students as the rate for new loans would change each year. There would also be no interest rate cap, which is lamented by many advocates. (Income-based repayment provides another alternative, however.)
If either of these plans is adopted, the interest rate cliff would be eliminated as students would no longer have to wait on Congress to know their rates. However, students are likely to see rates rise as Treasury yields return toward their historical norm. The Congressional Budget Office predicts that 10-year Treasury notes will yield 5.2% by 2018, which would put unsubsidized loans just over 8%. (This is still lower than the recent rate for unsubsidized graduate loans, with which I am quite familiar.) If rates go higher than that, I expect Congress to enact an interest rate cap in several years.
The federal budget process does not move quickly, especially with a divided Congress. While I do not expect large increases in the Department of Education’s budget, I am optimistic that a market-based solution to interest rates will be adopted in order to provide more certainty in the short run and to bring graduate loan rates closer to what the private market would otherwise offer.
Robert Kelchen 
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