Perkins Debate Poses Tough Choices, NAICU Member Views Sought

Although the debate over proposed changes to the Perkins student loan program has been off the radar screens of many outside of the nation’s capital, it continues to be a hot topic in the Washington student aid world. The debate boils down to three basic options:

• Fund a major expansion of the program, by removing some of its most important student benefits, so more students can avoid taking private loans
• Keep the program as-is, possibly requiring hundreds of millions of dollars in new money
• Get rid of Perkins loans all together

Adding to the complexity of the debate is confusion over whether the program will actually terminate in two years, if nothing is done.

Will Perkins Terminate?

Because some key dates in the Perkins Loan program were updated during the 2008 reauthorization of the Higher Education Act, and other dates were not, it's unclear whether the current Perkins program will end in two years, or continue until the Higher Education Act is once again reauthorized.

Government experts differ on exactly what will happen on October 1, 2012, when a provision in law says schools must start to return their incoming Perkins loan funds to the federal government.

Some claim that the program is authorized through the end of the reauthorization cycle, which goes until the end of the 2015-16 academic year. But others believe the recall date of October 1, 2012, overrides the general program authority.

If the former is true, then there is time to consider the various options at hand. If it is the latter, then the clock is truly ticking. In addition, the Education Department is expected to put forth its original plan to restructure the Perkins program within the Direct Loan program, in its FY 2012 budget proposal.

Unexpected Political Support

For years, Perkins loans have been among the least visible, and least politically supported, student aid programs. Administrations of both parties have routinely called for its elimination, and the program has not been infused with new federal capital since FY 2004. College participation is uneven, with lending authority largely concentrated in a small number of institutions. Many in Congress see the program as duplicative and unnecessary, and would like to see it shut down.

The Obama administration's interest in the program has been surprising, and its approach innovative. The administration wants to target additional federal loans at students who are otherwise likely to borrow in the more expensive private loan market, without increasing overall loan limits for all students. If properly crafted, such a policy could benefit resource-poor private colleges that successfully serve low-income students, but lack the institutional resources to meet those students' full need.

An Attempted Rewrite

The administration and Congress attempted to rewrite the Perkins program as part of the student loan reform bill that passed earlier this year (see earlier Washington Update story).

Included in that package was a plan for a sixfold expansion of the annual volume of Perkins loans, from about $1 billion to $6 billion, along with provisions for all colleges already in the program to continue receiving at least their current amount of Perkins lending authority, annually. Colleges would have been able to keep any historic institutional contributions to the program as former students repaid their loans.

New lending authority would have been allocated to colleges through a new formula, which would have factored in an institution's graduation rate, percentage of students receiving Pell Grants, and persistence rate for Pell recipients. Given these and other factors, private colleges would have received a significant share of the funding to help students avoid private loans.

Congress planned to fund the Perkins expansion through a number of avenues, including adding it to the Direct Loan program, eliminating the in-school interest subsidy, and aligning the loan forgiveness provisions with those in the current Stafford student loan program.

Even though this would have made Perkins loans more expensive for students, the NAICU board of directors endorsed the basic policy, since the expansion would have made these low-cost student loans available to more students, and guaranteed long standing Perkins schools access to their historic lending authority.

A Lost Opportunity

In the final, chaotic days before the passage of the controversial student aid reform bill and the conversion to direct student loans, reconfiguration of the Perkins program was dropped. This was largely due to a full-scale lobbying campaign by Perkins student loan servicers to keep the existing program alive and unchanged. The servicers, working through COHEAO (a coalition of Perkins loan schools and servicers) thought that if they defeated the Perkins changes in the student aid bill, they could simply keep the current program in place.

Because the student aid reform bill, and its billions in Pell Grant funding, were linked to the even more controversial health care reform bill, congressional education leaders ultimately were forced to drop the Perkins provisions in order to save the rest of the legislation.

Meanwhile, NAICU was unable to generate support for Perkins because the education committees never released legislative language on the final deal. This made it impossible to ensure that the program revisions would truly benefit more students.

Last Week’s Perkins Hearing

The House Budget Committee held a hearing last week on the importance of Perkins loans. The Sept. 22 hearing came as Perkins advocates in Congress attempt to create support for the program’s continuation, although supporters are divided into two camps over how to best keep the program alive.

House Budget Committee Chairman John Spratt (D-S.C.), a traditionalist, wants to keep the program alive with as many of its current features as possible. He emphasized the importance of a college education and the need to help low-income students finance it, in part, with low-interest-rate loans, like Perkins.

Spratt also noted that the "Perkins loan program provides vital employment for thousands of people across the country ... at colleges and at the private loan servicing companies" that colleges use. Many of these jobs are in Spratt’s home district.

Arguing that schools must stop making loans in October 2012 under current law, Spratt urged Congress to take action to support H.R. 5448, his bill to extend the Perkins loan program, as-is, for one year. However, the extension would cost $748 million over five years – a hefty sum that even some Perkins advocates admit makes it unlikely to pass.

Three witnesses, all more or less supportive of the current program, testified.

Crafting a Possible Compromise

NAICU has long been open to changing the Perkins program to include more colleges and ensure its long-term viability. Such change is especially timely now, given the waning political support for the program's continuation.

It's unlikely we will ever again have as good an offer as the one lost this past spring in the student aid reform bill. The most appealing aspect of that proposal was that existing Perkins colleges would have been guaranteed the same lending authority they currently have, while more colleges and borrowers could have been added to the program.

Still, there is the possibility of saving the program if current Perkins loan advocates are willing to compromise in several areas.

Any new proposal would have to be revenue-neutral or save the government money. Expanding a program while having it save money may sound impossible, but there are several ways this could still happen. Based on previous budget estimates, a Perkins program with some of the following changes could pay for itself.

The program would have to be an "add-on" to the current direct loan program, as proposed by the Obama administration. Before direct lending was mandated for all, this would have been extremely controversial. Now that all colleges are using direct loans, adding the Perkins program to that infrastructure generates money for the federal treasury. This also would eliminate the need for colleges to be in the loan collection business.

While the NAICU board of directors thought removing colleges from the costly collection business was a plus, it could mean a loss of private sector jobs in some key congressional districts, unless current servicers were hired by the Education Department to continue their collection work.

The in-school interest subsidy would likely have to be eliminated, as proposed by the administration. (Currently, with the subsidy, new graduates owe no more than they initially borrowed – an important long-term feature of the program.)

Assuming a sixfold expansion of the program, continuation of the subsidy would cost several billion dollars, and the fiscal reality is that the money isn't there. Needy students would still be able to access the in-school interest subsidy in the subsidized Stafford loan program, but there is no doubt that the loss of this benefit in the Perkins program would increase the cost of these loans for many students.

Depending on other program features, Perkins interest rates could have to increase from five percent. Under the savings structure proposed in the larger student loan reform bill earlier this year, a five percent interest rate could have been maintained.

That opportunity may have passed, however. If the bill has to be a free-standing measure that pays for itself, analyses indicate that an interest rate increase could be necessary to expand the program. This would be a big negative for students in a compromise to expand the Perkins program.

The Choice

The final assessment, then, is whether preserving the borrowing authority of currently participating schools, and providing additional borrowing authority at more schools, outweighs the negatives of eliminating the in-school interest subsidy, the possibility of increasing the interest rate, or the potential of losing the program all together.

On one hand, we’d see the loss of borrower benefits that have been an integral part of the program since it began in 1958 as National Defense Student Loans. Certainly, such changes are no one’s first choice.

On the other hand, a complete loss of the program could force more students into the more expensive private student loan market. Private loans generally have much worse terms and conditions, higher interest rates, no loan forgiveness, and can’t be consolidated with federal student loans.

An expanded Perkins Loan program could actually accommodate more students, including some of those currently in the private student loan market. Some graduate students now borrowing under the federal GradPLUS program, which offers a 7.9 percent interest rate, might save money with a lower-interest Perkins loan. Most important for private colleges, many institutions would be able to participate in the program at higher levels than they can now.

Your Thoughts?

NAICU is seeking members' views on the desirability and shape of a major rewrite of the program. Please send your comments to Maureen Budetti at maureen@naicu.edu.

For more information, please contact:
Maureen Budetti