A New Perkins Loan Proposal

The following are modifications proposed to the House legislation, H.R. 3221, on the Perkins Direct Loan Program.

1. Maintain the In-School Interest benefit. Currently students who borrow Perkins Loans are not charged interest while in school, deferment or during the nine-month grace period. Maintaining this in the expanded Perkins Loan Program would be best for students.

However, if that is not possible because of budgetary issues, the following proposal would reduce many students’ debt burden while encouraging degree completion.

Perkins Loan Graduation Reward Program:

Direct Perkins Loan borrowers pay 5% fixed interest, which is automatically deferred until repayment begins (six months after they leave school.) The interest that has accumulated is forgiven if the borrower completes a degree or recognized certification program.

2. Retain servicing at the institutional level, unless the institution opts out, for current Perkins Loan schools and for new schools. (New schools could opt out when they begin participating in the program.) Institutions are paid a fee equivalent to the payments made to Direct Stafford Loan servicers under the Department of Education’s billing contracts, so there should not be a cost to this. Institutions are going to be far more interested and able to participate in the Perkins Direct Loan Program, with an institutional contribution required, if they can have control over loan servicing and default prevention.

The terms and conditions of the servicing would be the same as under the current Part E of the Higher Education Act. Institutions have been servicing Perkins Loans for 51 years. They have proven they are capable of doing so. The law would simply say that Perkins Loans shall be serviced as they are now, with all the oversight and rules in place to ensure that servicers do the job correctly.

3. Include a requirement for an institutional contribution to the program. This is the new version of the current “match.” This would be a partial institutional guaranty against default. The school would be required to match annual loan volume based on tiers tied to the cohort default rate. For example, a school with a low Perkins default rate, such as 5% or less, would have a low match, such as 1%, or no match for an extremely low rate. A school with a higher rate, say 15%, would have to contribute more of a match, say 3%. (Note: these numbers are examples and need to be vetted with a broad array of institutions to determine workable tiers.) Schools new to the program would be judged according to their Stafford/PLUS rates. This will strongly encourage an institution to work with borrowers to keep them out of default while also offsetting some of the federal cost of the program directly through payment of the match and indirectly by reducing default rates.

4. Continue cancellations to the extent possible. This is a budgetary decision, one of priorities for members of Congress. These cancellation programs were created over the years by Congress and have helped encourage many students to enter public service careers.