The New Perkins Loan

College presidents applaud Obama administration's commitment to the program, but worry about some proposed changes.
June 15, 2011

WASHINGTON -- The Perkins Loan Program, which is scheduled to expire in 2014 and hasn’t seen a funding increase in seven years, might have a new life ahead. College officials who spoke at a forum here Tuesday say the Obama administration deserves credit for trying to preserve and expand the program, but some object to some reforms being sought.

Department officials said the changes would make the loans more efficient, as well as saving money that could be used to expand Pell Grants. Others at the panel said transforming the Perkins program was the only way to save it: Terry Hartle, senior vice president for government and public affairs at the American Council on Education, said the proposed changes are the loan program’s “last best hope.” That's because small Education Department initiatives could be an easy target for budget cutters looking to trim the deficit or pay for other priorities.

The Perkins program provides subsidized loans of up to $4,000 per year at a 5 percent interest rate for undergraduates. Individual colleges and universities administer the loans, meaning that students repay their colleges, not the government. The repaid funds are directed into making new loans. About 1,700 institutions currently participate in the loan program, which lends about $1 billion per year -- compared to $116 billion for the federal government's main direct student loan program.

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 percent. 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.

The changes would turn the program into a “money maker,” Hartle said, and the increased revenue would be used to pay for expanding Pell Grants for needy students.

College and university presidents on the panel, who represented both public and private institutions, praised the administration’s commitment to keeping the program alive but said they hoped they could keep their institutional flexibility. The discussion follows a letter sent this winter by several dozen presidents, spearheaded by Northeastern University's Joseph Aoun, who also organized Tuesday's session.

Some questioned the decision to do away with the interest subsidy and increase the interest rate in order to pay for Pell Grants, pointing out that many students who receive Perkins loans also receive the grants and would, in effect, be subsidizing themselves. But they also said they were eager to help the department get the changes signed into law and keep Perkins loans alive.

“I know how absolutely crucial that loan was for me,” said David Warren, president of the National Association of Independent Colleges and Universities, who said he received a Perkins loan -- then called a National Defense loan -- in order to help pay for college. The loans are a “linchpin” for students who still need more money after Pell Grants and federal direct loans, he said. “Absent that linchpin, the center may not hold. It will fall apart.”

The presidents cautioned the department about relying too much on federal graduation rates in developing the formula to determine colleges' loan volume. The presidents cited frequent criticisms that the rates do not always reflect reality, including students who transfer. Many students, especially low-income students who would be eligible for Perkins loans, need more than six years to complete college, they said.

At Trinity Washington University, 70 percent of the students receive Pell Grants and 10 percent receive Perkins loans, said Patricia McGuire, the university’s president. Even those who are 18 to 21 years old frequently have children or are supporting siblings or parents, and sometimes “stop out,” or take a few semesters off in order to earn money. “They look like dropouts in our graduation rate, but they’re not,” she said.

During a question-and-answer period after the panel discussion, Larry Chambers, the director of financial aid at Rensselaer Polytechnic Institute, said he was “getting really weary of having to break dreams.” But he said the Perkins Loan program should not become the Direct Loan program under another name, and said losing the interest subsidy was “disheartening.”

Department officials responded that with federal dollars limited, tradeoffs had to be made. “I’m unapologetic about using funds derived from our loan program to pay for Pell Grants,” said David Bergeron, director of policy and budget development for the Office of Postsecondary Education.

Those on the panel asked how they could help get the program secure in the budget, acknowledging that as concern rises about both federal spending and student borrowing, it might be an uphill fight. “Just designing it won’t get it done,” Warren said. “There is work to do.”


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