Perkins Program To End in Two Years

The Perkins student loan program will terminate on September 30, 2012, unless Congress makes a proactive effort to save it. As the clock continues to tick toward program termination, NAICU is increasingly anxious that few colleges are aware of the program's imminent demise.

Program Termination

The forthcoming Perkins program termination was called for in the Higher Education Act reauthorization enacted in 2008.  Many of those in the larger financial aid community, however, are unaware of the termination because all higher ed programs routinely are set to expire at the end of the reauthorization cycle - typically five years after enactment.

Under federal law, programs that fall under such education reauthorization cycles are automatically extended for 12 months without congressional action.  After that, if a new reauthorization isn't completed, Congress must pass special extensions to keep such programs operational.  In the course of the recent - and drawn out - HEA reauthorization, for example, Congress passed 13 temporary extensions to keep the student aid programs running.

However, the Perkins 2012 termination is different.  Unlike the routine expiration date of September 30, 2013, for most student aid programs under the current HEA, Perkins was given an earlier termination date of October 1, 2012.  Then Congress spent the anticipated "savings" from the early Perkins termination on other student aid programs.

What Was on the Table

The administration and Congress attempted to reinvigorate 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 program to continue receiving at least their current amount of Perkins lending authority annually.

The additional funds would have been distributed through a new formula factoring in an institution's graduation rate, percentage of students receiving Pell Grants, and the persistence rate for its Pell recipients.  Given these and other factors, private colleges would have received a significant share of the funding to help its students avoid private loans.

Congress planned to fund the Perkins expansion through a number of avenues:  by adding it to the Direct Loan program, by eliminating the in-school interest subsidy, and by 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 endorsed the basic policy, since the expansion would have made these low-cost student loans available to more students.

A Lost Opportunity

Then, in the final, chaotic days before passage of the controversial student aid reform bill and conversion to direct student loans, the Perkins program was lost.  That was largely due to a full-scale lobbying campaign by some student loan servicers who derive business from the Perkins program, to keep the existing program alive and unchanged. The servicers - working through COHEAO, a coalition of Perkins loan schools -thought that if they defeated the Perkins changes in the student aid bill, they could simply keep the current program in place

Given that the student aid reform bill - and its billions in Pell Grant funding - was 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 committees never released legislative language on the final deal.  This made it impossible to ensure that the program revisions would truly benefit students.

Current Status

Shortly after the health care bill passed without the Perkins fixes, three key members of Congress - Budget Committee Chair John Spratt (D-S.C.), Education Committee Chair George Miller (D-Calif.) and Perkins advocate Tim Bishop (D-N.Y.) - introduced a bill to extend the current Perkins loan program for an additional year. The extension would cost $748 million over five years, though - a hefty sum that, even Perkins advocates admit, makes the extension unlikely to pass.  It's a tall order to round up the political will needed, given that the Perkins program serves a relatively small number of colleges.

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 a change is especially timely now, with the waning political support for the program's continuation. The most appealing aspects of the proposal originally part of the student aid reform bill 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.

It's unlikely we will ever again have as good an offer as the one lost this past spring. Still, there is the possibility of saving the program if current Perkins loan advocates are more willing to compromise.

First and foremost, any new proposal would have to be revenue-neutral.  Expanding a program while having it save money may sound impossible, but there are several ways this could still happen.  By NAICU estimates, a Perkins program would have to include the following characteristics to be revenue-neutral:

• The program would have to be an "add-on" to the current direct loan program. Before direct lending was mandated for all, this would have been extremely controversial.  But now that all colleges are using direct loans, adding the Perkins program to that infrastructure allows the loans to become "federal assets," with significant savings to the federal government under its accounting rules.  This also would eliminate the need for colleges to be in the loan collection business.
  
• The in-school interest subsidy would have to be eliminated. (This subsidy means that when students graduate from college, they owe no more than they initially borrowed - an important long-term feature of the program.)  Assuming a sixfold expansion of the program, the subsidy would cost several billion dollars, and the fiscal reality is that the money just isn't there. Needy students would still be able to access the in-school interest subsidy on the subsidized Stafford loan program, but there is no doubt that the loss of this benefit would increase the cost of Perkins loans for many students.
  
• Perkins interest rates would have to increase from 5 percent to approximately 6.8 percent - the rate of the Stafford program.  As part of the savings structure under the larger student loan reform bill earlier this year, a five percent interest rate could have been maintained.  That opportunity has likely passed, however, and if the bill has to be a free-standing measure that pays for itself, analyses indicate that an interest rate increase would be necessary to save the program.  This would be the biggest negative for students in a compromise to salvage the Perkins program.

Trade-offs

The final assessment, then, is whether eliminating the in-school interest subsidy and increasing interest rate makes the Perkins loan program worth saving or not.

On one hand would be the loss of borrower benefits that have been an integral part of the program, since this oldest of Title IV student aid programs 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 much 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. 

Also, an expanded Perkins loan program could actually accommodate more students - including some of those currently in that private loan market.  And some graduate students now borrowing under the federal GradPLUS program (with an 7.9 percent interest rate) might save money with a lower-interest Perkins loan instead.  Most importantly for private colleges, many would be able to participate in the program at higher levels than they can at present.

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.

The Obama administration's interest in the program has been surprising and innovative.  At its heart, the administration wants to target additional federal loans at those who are otherwise likely to borrow in the more expensive private loan market, but 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.

Your Thoughts?

NAICU is interested in member comments or suggestions on the importance of the Perkins loan program.

Please send your comments to Maureen Budetti at NAICU.

For more information, please contact:
Maureen Budetti