Monday, December 22, 2014
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The Perkins Loan Faces Modernization or Elimination



The Perkins loan, a need-based loan program for college students, is undergoing review for a revamp to prevent its elimination in 2014.

As reported in Inside Higher Ed, the Perkins loan program is set to expire in 2014, along with several other campus-based aid programs like the Federal Supplemental Education Opportunity Grant (FSEOG) and Work-Study. However, while FSEOG and Work-Study will most likely be renewed as-is, the Perkins loan is undergoing some scrutiny in order to find ways to improve it. If the program cannot be modernized to fit the current landscape of college costs and financial aid, it could be eliminated.

The current Perkins loan program has some key points you should know about:

  • Perkins is a need-based loan program. Therefore you must file a FAFSA to determine your eligibility.

  • Your school's financial aid office will determine your eligibility based on your family income. The Perkins loan program is for students determined to have high financial need.

  • The Perkins loan is in the student's name and no credit approval is required.

  • Colleges generally award a maximum of $4,000 in Perkins funding per year, but many are awarded for lower amounts.

  • It has a fixed interest rate of 5%. All interest that accrues while the student is in school is paid for by the federal government.

  • There is a nine-month grace period after graduating or leaving school where no payments are due. Any interest generated during grace is paid for by the federal government.

  • Individual colleges and universities administer the loans. Repayment is facilitated by the colleges rather than the government. Repaid funds are used to make new loans each year.

  • About 1,700 institutions currently participate in the Perkins loan program, and lend about $1 billion per year.

However, government officials are searching for ways to either make this program more impactful, or scrap it and forward the extra money to the short-funded Pell grant program.

From the Inside Higher Ed article:

"The Obama administration proposed expanding the program to 2,700 institutions and lending $8.5 billion per year. But the Perkins loans would closely resemble unsubsidized federal student loans: Interest would accrue while students are enrolled, the loans would be serviced by Education Department contractors rather than individual institutions, and the interest rate would increase to 6.8%. Institutions would still be able to decide how much money to lend to each student, but their total available loan volume would be determined by a formula that would 'provide incentives for successfully graduating more low-income students,' according to an overview department officials provided at the panel."

Some perspective: Financial aid administrators want to retain this program for its flexibility. It's a reserve of need-based loans they can distribute to students, and can be very useful in small funding shortfalls that families sometimes face.

However, the scale of the program, and the amount of time spent administering it, has made it rather antiquated. The $1 billion-a-year Perkins program is tiny in comparison to the $116 billion in federal Stafford and PLUS loans originated through Direct Loans, the flagship government loan program.

With college costs continuing to rise, the Perkins program has barely kept up. Most loans are awarded for $1,000 to $2,000 a year. At higher-cost schools, this is a drop in the bucket.

Making a Cash Cow: Terry Hartle, senior vice president for government and public affairs at the American Council on Education, Washington, D.C., referred to the proposed program changes as a way to make the Perkins program a "money maker." I would agree, but this is because of increasing the rate to 6.8%, equivalent to the current Stafford loan program and eliminating the important in-school interest subsidy. The great benefit of the Perkins loan is that all interest accrued while enrolled in school is paid for by the government but, with this new plan, that option would be stripped. At that point it just looks like an unsubsidized Stafford loan resembling Perkins in title only.

There is still much time before the program expires and college presidents are already trying to prevent the Perkins program from ending. However, with budget cuts looming, extra student funding programs of low volume would be at risk of termination. If the Perkins loan does not modernize, it might be eliminated.

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Ken O'Connor is a financial aid expert and the director of student advocacy at cuStudentLoans.org. Learn more about credit union private student loans and college planning by visiting his blog.



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