Obama puts colleges on notice: Lower tuition or face reduced funding

President Barack Obama called Friday for an overhaul of the higher education financial aid system, warning that colleges and universities that fail to control spiraling tuition costs could lose federal funds.

The election year proposal was also a political appeal to young people and working families, two important voting blocs for Obama. But the initiative faces long odds in Congress, which must approve nearly all aspects of the president's plan.

Speaking to students at the University of Michigan, Obama said the nation's economic future would depend in large part on making sure every American can afford a world-class education.

"We are putting colleges on notice," Obama said. "You can't assume that you'll just jack up tuition every single year. If you can't stop tuition from going up, then the funding you get from taxpayers each year will go down."

Obama first announced the outlines of the financial aid proposal during Tuesday's State of the Union address. His plan targets what is known as "campus based" aid given to colleges to distribute in areas such as Perkins loans or in work study programs. Of the $142 billion in federal grants and loans distributed in the last school year, about $3 billion went to these programs. His plan calls for increasing that type of aid to $10 billion annually.

He also wants to create a "Race to the Top" competition in higher education similar to the one his administration used on K-12 to encourage states to better use higher education dollars in exchange for $1 billion in prize dollars. A second competition called "First in the World" would encourage innovation to boost productivity on campuses.