Expanding and Improving the Federal Perkins Loan Program: Key Issues

The Obama Administration and the House have proposed a major expansion of the Perkins student loan program, something advocated by The Coalition of Higher Education Assistance Organizations for many years. However, the proposed “Direct Perkins Loan Program” has key flaws which mean it fails to serve students as well as it should. Key improvements must be made to truly expand educational opportunity for all Americans.

H.R. 3221 includes spending priorities that, while important, would be made at the expense of reducing student loan indebtedness. COHEAO believes that funds should first be dedicated to reducing the cost of borrowing for middle class and low income students who need Perkins Loans to finance their education.

Here are COHEAO’s proposals for improvements:

· Retain the in-school interest benefit. The Perkins Loan Program has a fixed interest rate of 5%, making it a low-cost student loan. These loans accrue no interest while students are in school and for nine months afterwards, a very important benefit that reduces students’ debt burden. This interest benefit should continue under the new Perkins Program. Perkins Loan borrowers’ debt burden upon graduation should be kept as low as possible rather than increased by thousands of dollars in order to pay for school construction or other programs, as the House bill proposes. An undergraduate Perkins borrower will owe $5,000 more when they graduate if they lose the in-school benefit. Graduate students will owe even more.

· Allow schools to continue managing the Perkins Loan Program in order to achieve the best results for the program and its students. The experienced professionals at schools are best equipped to work with their student borrowers as they have done for decades. Schools care about their former students. Far more than a national federal contractor, they work with borrowers to help them get smoothly through the repayment process. It is in the best interest of the borrower to work with their school rather than having the federal government immediately involved in loan collection. Successful management is illustrated today by the latest Perkins default rate of only 5.15%, a rate lower the Stafford Loan Program even though Perkins Loans are targeted to help students with high need.

· Retain the superior Perkins Loan Cancellation benefits. Perkins Loans can be cancelled under current law for borrowers who work in public service jobs. Congress in 2008 added six additional professions eligible for cancellation. Perkins cancellation opportunities are far more flexible and helpful for borrowers than those available to Stafford borrows. The House bill repeals these benefits.

The House Bill, like the Administration’s proposal, includes positive proposals that COHEAO supports: an expansion of available loan funds to include more students and schools and keeping at least the current level of loan funds available to schools currently participating in Perkins.

· An alternative partial in-school interest benefit would accomplish the goal of encouraging students to complete their education and graduate while at the same time reducing the federal cost of the benefit. Under that alternative, interest would accumulate during the in school period but would be forgiven upon graduation within six years.