The election-year proposal is in response to a government report showing that one-third of America's 80,000 state schools have leaky roofs, crumbling walls, inadequate electrical systems, broken windows and unusable bathrooms. An estimated $112 billion in expansion and repairs is needed.
"We cannot expect our children and our teachers to build strong lives on a crumbling foundation," the president said.
Mr Clinton wants to reimburse communities for up to half the cost of interest on construction loans they use to renovate their schools. The poorest districts would get top preference under the programme, which is aimed at using the $5 billion in interest subsidies to stimulate $20 billion in overall school improvements.
The proposal needs approval from the Republican-controlled Congress, which indicated it was in no hurry to pass a measure that would help Mr Clinton in an election year.