Thursday, June 24, 2010

Perkins Loan Program Faces an Uncertain Future

For over half a century, the federal Perkins Loan program has helped low-income students like Whitney D. Lyons afford college. Ms. Lyons, who graduated from Gonzaga University two years ago and is now a financial-aid counselor there, borrowed $15,000 in Perkins Loans to supplement her other government aid, including Pell Grants and Stafford Loans.

Ms. Lyons's parents, a taxi driver and a nursing-home worker, were unable to pay for her education. She said that her Perkins loan, for which the government subsidized the interest until she graduated, was a lifeline.

But whether future students will be able to receive these low-cost loans remains uncertain. The program is set to expire in 2012, and Congress has yet to come up with a solution to extend its benefits.

Created by Congress in 1958, the Perkins Loan program provides low-interest loans to financially needy students through a cost-sharing agreement between the federal government and colleges. About 520,000 students received Perkins Loans, averaging $2,125, for the 2009-10 academic year.

Perkins dollars are now distributed by campuses to the most financially needy students first, often those who are eligible for Pell Grants. Even so, in 2007, roughly 23 percent of recipients were dependents who came from families earning more than $60,000 a year. The loans, which carry a 5-percent interest rate, have more favorable terms than the far more common Stafford Loans.

The program's fortunes have fallen, risen, and then fallen again in recent years. President George W. Bush proposed eliminating Perkins, but the Obama administration has sought to expand and overhaul the program, pitching it as key to improving affordability for both low-income and middle-class students.

Still, the president has been unable to move his plan through Congress. A provision to increase the size of the loan program from $1-billion per year to $6-billion was cut from the final version of the legislation to overhaul student loans that passed this year. Delays in passing the bill had reduced the savings available for student aid.

Even if Congress pushes back the end date of the Perkins Loan program, which several lawmakers have said they intend to try to do, Perkins would probably need an infusion of federal dollars to keep providing awards at the current level.

Congress has not added capital to the program since 2004. This year federal lawmakers also did not reimburse colleges for the cost of forgiving the Perkins loans of students who take public-service jobs.

Without those sources of money, colleges that administer Perkins loans must depend on loan repayments and interest paid on existing Perkins loans to make new loans. That limits the number of new loans colleges can make, and the amount of money available for helping new borrowers is further squeezed by defaults.

It could be difficult for Congress to allocate large sums of new money for Perkins, given that lawmakers just spent billions on student aid in the student-loan overhaul. Supporters of Perkins say the end of the program could mean dire consequences for students.

"Students won't be able to get the lowest-cost loans available to them," said Harrison M. Wadsworth, executive director of the Coalition of Higher Education Assistance Organizations, which lobbies on behalf of the Perkins program. "For some, it might be the difference between being able to attend college. Others will graduate with more debt."

A Short-Term Extension

Advocates for the program say that their immediate goal is to push back the 2012 end date.

Rep. John M. Spratt Jr., a Democrat of South Carolina, and Rep. Timothy H. Bishop, a Democrat of New York, plan to introduce legislation to extend that deadline by a year.

"That would be a very serious mistake if we were to allow this program to disappear," Representative Bishop said. "We need again to buy some time with the one-year extension of existing law and try to put together a robust, multiyear extension."

But even if an extension passes, the larger question remains of what a new Perkins Loan program would look like.

Under the plan President Obama has advocated, federal dollars would no longer be allotted to colleges based strictly on historical formulas and usage rates. Instead, a portion of the money would be used to reward institutions that hold down their tuition or graduate large numbers of low-income students (though colleges would be guaranteed to receive at least as much as they do now).

"The administration still absolutely supports modernizing Perkins and expanding it so it's available to more schools, so that we can reduce the need for students to use more-expensive private loans," said Jane Glickman, a spokeswoman for the Education Department.

The changes the Obama administration has proposed have been controversial among colleges. The administration suggested that the Education Department, instead of colleges, directly administer the loans, and that the federal government stop subsidizing interest payments for students still in college.

Student-aid advocates and financial-aid officials opposed the interest plan, saying that the proposal would create a burden for low-income students. They are also wary of plans to tie Perkins to tuition.

Representative Bishop said Congress might finance the program in its current form or back a model similar to the president's. But given the controversy over the president's proposed changes, agreement on the right approach could be challenging, potentially making passage of an expansion of the program difficult.

"There's a lot of hurdles here," Mr. Bishop said. "We clearly have to pay for it; that's going to be a challenge. But I do think that if we were to allow Perkins to lapse, we will be taking a significant step backward in terms of the access and affordability goals that we have been pursuing."

Diane Auer Jones, who was an assistant secretary for postsecondary education in the Bush administration, said she favors Perkins loans over high-interest private loans as a way to help middle-income students. But she said that extending Perkins may not be financially possible.

"The big issue is: Can we afford it?" she said. "With a $1.6-trillion deficit, there are lots of really good programs that we're going to have to cut."

Whether Congress would pass another piece of student-aid legislation on the heels of the student-loan overhaul or whether an expansion of Perkins could be attached to another bill is also unclear.

"We have a desire to keep working on this until we get a resolution," said Cynthia A. Littlefield, director of federal relations for the Association of Jesuit Colleges and Universities. "We're obviously in limbo."

Depletion of Dollars

College officials say that extending the 2012 deadline is not enough to save the program, even if colleges could continue to make new loans from repayments. Aid officials say that unless Congress allocates new capital or makes up for forgiven loans, cash will eventually dry up.

According to estimates in the president's budget for the 2011 fiscal year, approximately 490,000 students are expected to receive Perkins loans next year—30,000 fewer than this year.

Supporters of the Perkins program say more capital is particularly needed during the current economic crisis, when colleges are scrambling to help growing numbers of students struggling with finances.

Catherine M. Simoneaux, director of the Office of Scholarships and Financial Aid at Loyola University New Orleans, said more students were defaulting on their Perkins loans. And colleges rely on payments from borrowers who have graduated to make new loans.

"We can only lend what we collect," she said. "And when you have a recession, you don't collect as much."

Ms. Simoneaux said the university still expected to lend about the same amount in Perkins dollars next academic year as this past year, about $420,000, because many local students' economic fortunes were improving post-Katrina and because Loyola was working hard with students to combat default.

But Alisa M. Abadinsky, director of university student financial services and cashier operations at the University of Illinois at Chicago, said it would lend close to $2-million in Perkins loans next academic year, down from between $2-million and $3-million this year.

Ms. Abadinsky said the university was owed roughly $270,000 for forgiven loans, which would "definitely impact a good number of students that we could have awarded funds to."

Helping Needy Students

Supporters of the Perkins Loan program say they are optimistic that Congress will extend the 2012 deadline and eventually add much-needed capital to the program. But if the program does expire, many needy students could be left scrambling for ways to pay for college.

Mr. Wadsworth, of the higher-education-assistance group, said the end of Perkins could lead more students to take out unsubsidized Stafford Loans or private loans, both of which carry higher interest rates than Perkins loans.

The current interest rate for unsubsidized Stafford loans is 6.8 percent, and that interest accrues while students are in college. Private loans have significantly higher interest rates than government-backed loans, sometimes twice as high, and less-forgiving repayment options.

"We would hope if they take the money back, they would come up with an alternative loan program, especially for the Pell-eligible students," Ms. Simoneaux said. "The private lending programs are not optimal for anybody, especially for a first-generation Pell-eligible student."

Ms. Lyons, the Gonzaga graduate, said she would have had a hard time getting a co-signer for a private loan because her parents could not have passed a credit check. Going to Gonzaga might not have been possible without a Perkins loan, she said.

For other students, like Lori L. Hardesty, who graduated from the Johns Hopkins University in 1996, the loan-forgiveness option was key. Ms. Hardesty, who was raised in foster care after her mother died and her father's struggles with mental illness worsened, took out $11,200 in Perkins loans to help pay for college.

After graduation, she began working with the Choice Program, run by the Shriver Center at the University of Maryland-Baltimore County. Through the program, Ms. Hardesty worked with youths in the juvenile-justice system and earned $17,500 a year. Ms. Hardesty is now a program coordinator for service learning at the Shriver Center.

"It was a big risk for me taking this low-paying job," she said. "I knew I was doing the right thing, but I was not in the best financial situation to pay the bills and also pay my school loans."

She credits the Perkins loan, in part, with helping her pursue public service. Most of that loan, $9,500, was forgiven after she realized she was eligible for loan cancellation.

"I wouldn't be where I am without it, simply put," she said.