College tuition could soon become a little bit cheaper at least if President Obama gets his way.

During his State of the Union address last week, President Obama announced several proposals that would make paying for college tuition within reach for more students and their families. These include a tax credit of $10,000 for students who attend a four-year undergraduate college or university and a small increase in the Pell grant. Also, the president proposed changing an existing federal-student-loan repayment plan the income-based repayment plan -- or IBR -- by lowering the minimum amount borrowers are required to pay each month and shortening the repayment period.

The proposals address the widening gap between college costs and the salaries that pay for them. College costs are rising anywhere from 5% to 10% depending on the university and part of the country, and incomes aren t keeping up with that, says Josh McWhorter, president of Black Oak Asset Management, a financial planning and advisory firm that specializes in college planning. If you apply these numbers to tuition and incomes 20 years down the road, you ll see a great disconnect.

Detailed information about these proposals hasn t be laid out yet. And a big unknown is whether or not the tax credit will phase out based on income thresholds. However, the Pell grant will continue to apply primarily to lower-income families; currently, 96% of Pell grants are issued to families with less than $50,000 in annual adjusted gross income, according to FinAid.org. For low-income families, increase in help is a good thing, but middle-income Americans are basically being left out, says McWhorter.

Here are three changes college students and their families could see as early as in the 2010-11 academic year and the impact they ll have on their out-of-pocket tuition expenses.

Tax credit

When a bank underwrites a student loan, it often receives a subsidy as a result. In his State of the Union address, President Obama proposed to take that subsidy money and give families a $10,000 tax credit for four years of college.

On the surface it does sound good, says McWhorter. An extra $10,000 could wipe away a semester or a year s worth of college tuition (depending on the institution).

But, there are many questions that need to be answered, including whether the tax credit will be refundable or not. If it s nonrefundable, families that don t owe anything on their income taxes won t benefit from such a tax credit it would only be applied to the amount that families owe on their income taxes. Also, there s a question of when this tax credit would be distributed and whether families will have to wait until their child graduates college to get the tax credit. It s also very possible that not all families will qualify for the tax credit especially if it gets pegged to income thresholds.

McWhorter points out that this tax credit doesn t help students who pursue a two-year college degree or trade schools.

The American Recovery and Reinvestment Bill of 2009 raised the maximum federal Pell grant from $4,731 a year to $5,350. For the 2010-11 academic year, the maximum amount rises to $5,550. Now, President Obama is proposing to increase the Pell grant to $5,710 for the 2011-12 academic year. This is helpful to lower income families, but doesn t apply to the middle class.

Should this new proposal become reality in its current form, the Pell grant s maximum amount would be pegged to the Consumer Price Index, plus one point, in order to provide inflation hedging. The inflation-hedge mechanism would start in 2011. Of course, once inflation kicks in it s unlikely that it will keep up with the rate at which college tuition is rising. According to the College Board, college tuition for 2009-10 rose by 6.6% in private four-year colleges from the previous year (to an average of $26,273) and by 8.8% in public four-year colleges (to an average of $7,020).

Changes to income-based repayment plans

An IBR plan bases a borrower s monthly payment on income, not on debt. Under regulations that went into effect in July 2009, IBRs cap monthly payments at 15% of discretionary income. Eligible college graduates include those repaying federal Stafford loans, Graduate Plus loans and federal consolidation loans.

President Obama s proposal had three components. First, it would lower the percentage of discretionary income in IBR plans from 15% to 10% - meaning that borrowers payments would shrink. Second, it would forgive any outstanding amount owed on the loan after 20 years instead of the current 25 years. Lastly, the president said he would continue the IBR provision that forgives outstanding payments on loans after 10 years, if the recipient chooses a career in public service.

How does that translate into dollars and cents? With IBR, discretionary income is defined as the amount by which your income exceeds 150% of the poverty line, which for a single person is $10,830, says Mark Kantrowitz, founder of FinAid.org. Currently, a college graduate who has $40,000 in federal student loans and is making $30,000 pays $171.94 a month. If the proposed changes go into effect, that amount will drop to $114.63 a month.

In most cases, if [borrowers] have high debt relative to income, they will be better off with IBR, says Kantrowitz. He says the proposal would result in repayment relief to hundreds of thousands of borrowers whose federal student loan debt exceeds their income, and it would cut their monthly payments by an additional one third. And he says the acceleration of loan forgiveness will help reduce the probability of borrowers still paying their federal student loans when their children enroll in college.

Kantrowitz estimates that in total the proposals will cost the government $3 to $4 billion over 10 years should they become reality. That s hundreds of millions of dollars per year, and when you look at the federal budget, it s a drop in the bucket. He says it s possible that these changes could be added to the Student Aid and Fiscal Responsibility Act, which passed the House last year but is pending in the Senate.