Breaking down the budget: Analyzing the plan

By Gus Bode

President Obama’s budget proposal, released Thursday, includes substantial changes to many areas of financial aid. Mark Kantrowitz, publisher of and director of advanced projects for the searchable scholarship database FastWeb, helps break down the proposed measures.

The text of the Obama’s budget proposal appears at

What it says: ‘The administration will index Pell grants to the Consumer Price Index plus 1 percent … (and) make the Pell Grant program mandatory to ensure a regular stream of funding and eliminate the practice of ‘backfilling’ billions of dollars in Pell shortfalls each year.’


What it means: Congress decides each year how much money to give the Pell Grant program, but all students who qualify for the program get the money, even if Congress has not allocated enough. This sometimes leads to shortfalls, Kantrowitz said. Obama’s plan would give the program mandatory funding, meaning Congress would not go through the appropriations process each year.

Increasing it by the Consumer Price Index would keep the program consistent with inflation, and the extra 1 percent would help because college costs go up faster. ‘If they let it increase only by inflation, it would, over time, the value of the Pell Grant would erode, whereas by doing the inflation plus 1 percent it helps preserve the buying power of the Pell Grant,’ he said.

What it says: ‘The president’s budget asks the Congress to end the entitlements for financial institutions that lend to students. … The approach in the budget, original all new loans in the direct lending program, saves more than $4 billion a year.’

What it means: There are two types of federal loans: direct loans and private loans that are subsidized by the government. ‘What essentially the government was doing is lending money to these lenders so they could continue making loans,’ said Kantrowitz, who added that the government also made money from that program. If Obama is successful in discontinuing it, the loans would come directly from the government, Kantrowitz said. And while students might not notice, aside from possibly receiving money faster, the change would have a devastating affect on the lending industry, he said.

But he said eliminating the competition could have another negative effect: ‘The direct loan program seems to be among the better ones and one of the reasons for that is there are all these federally guaranteed student loan lenders just waiting to pounce on any mistake by the Direct Loan program. So that made sure the Direct Loan program operated more efficiently and with better customer service than it might have otherwise.’

What it says: ‘The budget also makes campus-based, low-interest loans more widely available through a new modernized Perkins Loan program.’

What it means: The Perkins Loan program would increase the amount leant to $6 billion a year, making it available to more students, and it would change the way the funds are allocated among schools. Kantrowitz said schools receive money for the program as a ‘historical allocation,’ meaning ‘you get whichever amount of funding you have because you got that amount of funding in the past.’ The proposed changes indicate that schools would receive money based on the number of needy students who attend, though the details are not yet clear, he said.


Obama’s plan would also cause the government to stop paying interest on the Perkins Loan while students are in school. Instead, the interest would accrue and students would owe more when they got out, he said. ‘You’d still be able to defer payments to the loan while you’re in school,’ he said. ‘It just means it will be a little bit more expensive than the Perkins Loan was in the past.’ The money the government saves could go to other forms of financial aid such as the Pell Grant, he said.

What it says: ‘The budget includes a five-year, $2.5 billion Access and Completion Incentive Fund to support innovative state efforts to help low-income students succeed and complete their college education.’

What it means: The money would sponsor programs to help students make it to graduation, though the details are vague in the budget, Kantrowitz said. But he said the money would probably not fund efforts such as giving students money when they graduate, as SIUC did until last year. ‘I think it’s more going to be counseling-type programs that directly giving money to individuals, because $2.5 billion might sound like a lot, but it’s just a drop in the bucket,’ he said.

What it says: ‘The administration will also simplify the student aid application process.’

What it means: This was one of Obama’s campaign promises. Kantrowitz said it could mean that the government would turn the Free Application for Financial Aid into a checkbox in the federal income tax return, as most of the information required for the FAFSA comes from income tax returns.

What it says: ‘The administration provided ‘hellip; funds to be used as a down payment toward the goal of tripling the number of graduate fellows in science.’

What it means: Instead of giving money directly to universities, the government would probably accomplish this goal by giving more funding to existing graduate fellowship programs, such as the National Science Foundation’s graduate research fellowship, Kantrowitz said.

What it says: ‘To help students pay for college, the administration created a new $2,500 American Opportunity Tax Credit in the Recovery Act. ‘hellip; The budget proposes to make this tax cut permanent.’

What it means: ‘The expansion of the HOPE scholarship increased the amount of the tax credit you can claim from $1,800 to $2,500. It also expanded the income phase-outs and made the HOPE scholarship partially refundable so even low-income students can benefit from it,’ Kantrowitz said.