The government proposes to take on a greatly expanded role in making college affordable and in ensuring that students earn degrees or credentials.
Pell Grants would be tied to inflation for the first time since their inception, providing annual raises for recipients. The grant program also would be turned into a entitlement program with guaranteed funding, like Social Security or Medicare.
"We're ending the era of zero responsibility, and making an investment critical to our economic future," Secretary of Education Arne Duncan said in a conference call with reporters.
Pell Grants are the bedrock of college aid, but soaring tuition and fees over the last two decades have eroded their value. Twenty years ago, the grants covered 50% of the cost of education at a public college, including room and board, and 20% at a private college. By 2008, the figures had slipped to 32% of public college costs and 13% of private costs.
President Obama also proposes that the government become the direct lender for all federally backed student loans, ending subsidies to private lenders and saving the government $4 billion annually.
The subsidized program provided $56 billion in loans to 6 million students last year. The government's direct loan program provided $14 billion in loans to 1.5 million students.
Kevin Bruns, executive director of America's Student Loan Providers, opposed the proposal, saying guaranteed loans from private lenders had been "a rare source of stability for families. Now is not the time to talk about abolishing them."
Obama is seeking to significantly boost Perkins loans, which colleges award to students with unexpected expenses. The money had been allocated to a limited number of institutions under a formula that favored older, more established private colleges and excluded community colleges, said Sandy Baum, senior policy analyst for the College Board.
Under Obama's proposal, that money would be available to 2.7 million students at all 4,400 higher- education institutions.
The president resisted calls to raise loan limits, which some analysts said could trigger spiraling tuition or over-borrowing.
In another initiative, the president is seeking $2.5 billion to partner with states in programs to keep college students on track until they finish their education.
Just under half of the nation's college students obtain a degree or certificate, Baum said.
Obama also called for simplifying the complicated financial aid application process, but he did not say how he would do it.
Several analysts said they are waiting to see details in what could be the pivotal element in the plan.
"If they don't simplify the system, it will never be as effective as it could be," Baum said.
Many higher-education advocates praised the budget proposals.
"It goes beyond anything any of us could have wished for," said Barmak Nassirian, associate executive director of the American Assn. of Collegiate Registrars and Admissions Officers, and a frequent critic of higher-education funding schemes.
"It's visionary," he said. "You'd have to go back to Lyndon Johnson to find a commitment to education like this. This isn't just more money, it's intelligently spent money."