Corrected on 3/25/08: A previous version of this story incorrectly said that graduate students can borrow a maximum of $10,500 a year in Stafford loans. That is the maximum for adult, or non-traditional, undergraduates. Graduate students can borrow up to $20,500.
The timing couldn't be worse for college students. As private education loans are becoming more scarce and expensive, the amount of federal Perkins loans—at just 5 percent interest, the best student loan deal available—is plunging.
College financial aid officers around the country are reporting that the amount of money in the Perkins pool has dropped so dramatically in recent months that U.S.News & World Report estimates perhaps 50,000 needy students who would have been offered the low-cost loans last year won't be offered one this year. In addition, even those who do manage to land a Perkins loan will likely see the size of the loan shrink. Other, more expensive federal education loans, such as Stafford and PLUS, will be available to every student and parent, however.
Financial aid workers say the Perkins reductions are especially painful because Perkins loans go only to the poorest students and are such good deals. Schools can offer undergraduates whom they determine are "exceptionally needy" up to $4,000 a year in Perkins loans, which charge no interest while the student is enrolled or during the first nine months after a student leaves school. (Graduate students can borrow up to $6,000 a year.) They can be forgiven if a graduate spends five years teaching in troubled schools or teaching in-demand subjects such as math or science.
The Perkins program has been hammered down by a one-two political and economic punch. The federal government has failed to add money to the Perkins pool to keep up with rising college enrollment. In addition, rising interest rates on other education loans have caused those who've already taken out Perkins loans to hold on to them longer, leaving little to lend out to new students.
That combination means that thousands of current and future college students, who are just now receiving their financial aid award letters, are about to get some bad news. Michigan State University, for example, made $7 million worth of Perkins loans to 6,600 of its neediest students for the 2007-08 academic year. This fall, however, MSU expects to have only a little more than $5 million in its Perkins pool. MSU last year decided not to offer Perkins loans to graduate students. And for this fall, financial aid director Rick Shipman expects to cut the number of Perkins loans to undergraduates to about 4,400. MSU will also cut the average size of a Perkins loan from last year's $1,200 to just $1,000 this fall. "This is a huge hit...and it is happening across the country," Shipman says.
It is indeed. The University of Maryland College Park says its Perkins funding has fallen to half of last year's $2.3 million. Ohio University reports that it is so short on Perkins funds that about 100 students who would have gotten Perkins loans worth $2,100 apiece last year won't be getting them this year, a decline of 12 percent.
From 2000 to 2005, an average of about 725,000 students received Perkins loans worth an average of $2,100 apiece each year, according to the Department of Education. College financial aid officers say they expect this fall's numbers to drop back to levels seen in the mid-1990s—about 670,000 students receiving about $1,500 apiece in Perkins loans for the year.
The students who lose their Perkins loans this year will be left with much less attractive alternatives. Needy students, typically those with family incomes below about $40,000, are eligible for the next-best education loan deal: "subsidized" federal Stafford loans, which will cost only 6 percent this fall. All other students can get regular Stafford loans that have a maximum annual percentage rate of about 7 percent after all fees are counted in but charge interest even while the student is in school. A few lenders, such as MOHELA, are advertising discounts of up to 2 percentage points off regular Stafford loans, however.