Summary of President Obama's Budget Blueprint for Federal Student Aid

Mark Kantrowitz

January 30, 2012

This article summarizes President Obama’s FY2013 budget proposals for the federal student aid programs. Most of these proposals will require Congressional approval before they can be implemented. The combined cost of the President’s proposals are in excess of $10 billion per year.

Editor’s note: This article has been updated to reflect the education appendix to the FY2013 budget, as released on February 13, 2012.

Student Loan Interest Rates

Who: 7.4 million undergraduate students receiving need-based subsidized Stafford loans in 2012-13.

What: The fixed interest rate will be 3.4% instead of 6.8%.

Who Doesn’t Benefit: The interest rates on subsidized Stafford loans to graduate and professional students will remain at 6.8%. The interest rates on unsubsidized Stafford loans will remain at 6.8% for all students.

Duration: The change is a one-year extension of the 3.4% interest rate, just for new loans in 2012-13. It is not a permanent extension.

Impact: The average subsidized Stafford loan to undergraduate students is about $3,500. Congress eliminated subsidized interest during the 6-month grace period after graduation for new loans in 2012-13 and 2013-14. Assuming that the students capitalize the interest during the 6-month grace period, the difference in total payments over the life of the loan will be $888 on a 10-year repayment term ($7.40 per month) or $1,855 on a 20-year repayment term ($7.73 per month). Assuming a typical distribution of repayment terms, an additional year of 3.4% fixed-rate subsidized Stafford loans to undergraduate students will cost the federal government more than $7 billion.

Background: The College Cost Reduction and Access Act of 2007 (P.L. 110-84) enacted a phased-in interest rate reduction on subsidized Stafford loans to undergraduate students, gradually reducing the interest rates from 6.8% to 3.4%. This legislation was enacted to fulfill the Democrats’ “Six for ’06” pledge to slash the interest rates on student loans in half. The interest rates were reduced from 6.8% in 2007-08 to 6.0% in 2008-09, 5.6% in 2009-10, 4.5% in 2010-11 and 3.4% in 2011-12. If Congress does not act, the interest rates will be 6.8% in 2012-13.

Subsidized Interest to Undergraduate Students

What: The Obama administration proposed to eliminate subsidized interest on subsidized Stafford loans borrowed for education beyond the 150% timeframe limitation.

Background: The Budget Control Act of 2011 elimianted subsidized interest on subsidized Stafford loans to graduate and professional students for new loans originated on or after July 1, 2012. The Consolidated Appropriations Act of 2012 eliminated subsidized interest on subsidized Stafford loans to undergraduate students during the 6-month grace period after graduation for new loans originated in the 2012-13 and 2013-14 award years. The new proposal would eliminate an additional subset of subsidized interest payments by the federal government.

Double the Number of Federal Work-Study Jobs

Who: About 713,000 mostly undergraduate students currently receive Federal Work-Study jobs as part of their need-based financial aid packages. (About 4% of the jobs go to graduate and professional students.) The number of Federal Work-Study jobs would increase to 1.4 million per year, phased in over five years. There would be 110,000 additional Federal Work-Study jobs in FY2013, at a cost of $150 million.

What: The Federal Work-Study program provides part-time jobs to college students to help them earn money to pay for college costs, such as tuition and textbooks.

Impact: The typical Federal Work-Study job involves 8-12 hours of work per week and pays an average of $1,642 per year. Wages must be at least the federal minimum wage of $7.25 per hour. The federal government pays 75% of the wages, with the remaining 25% paid by the employer (usually the college). The cost to the federal government for this proposal, when fully phased-in, will be about $1 billion a year.

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