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.
Unfortunately, the federal government won't let most traditional undergraduates borrow more than $5,500 a year through the Stafford program. (Adult, non-traditional undergraduate students can borrow a maximum of $10,500 a year in Stafford loans.) The average net cost of attendance at a public four-year university (after subtracting out scholarships) is about $13,000, so many students who max out their Stafford loans still need to borrow more. Those students can ask their parents to borrow through the federal PLUS program, which charges a maximum of 9.4 percent after all fees are counted. Or they can try to get a bank to approve a private loan. But because of the recent credit crunch, banks are tightening up on private loans, rejecting all but those with the best credit and often charging even those folks higher interest rates.
The higher interest rates on other loans and the quirky rules governing the Perkins program are at the root of the Perkins shortage, says Larry Zaglaniczny, director of congressional relations for the National Association of Student Financial Aid Administrators. While the federal government guarantees that anyone who qualifies for a federal Stafford or PLUS loan will get their money, there is no such guarantee for Perkins loans. Instead, each college has a fixed pool of Perkins money it can lend. Schools have to wait until their graduates start paying old Perkins loans back to get money they can then recycle out to new students. During the first half of the decade, most college graduates paid off Perkins loans very quickly because interest rates in general were so low that many consolidated all their educational debt into one new lower-cost loan. But now that interest rates have spiked upward, most new graduates are choosing to keep the Perkins loans and their 5 percent rate over the 10-year term of the loan. So instead of getting all their money back quickly after a student's graduation, colleges are collecting a few hundred dollars a month from each borrower.
One reason Washington isn't boosting the Perkins program is because some in Congress and the administration feel the program is not fair. Perkins funding has not been spread equally to all schools. Because each school's Perkins pool was set years ago, schools that have recently seen a big jump in enrollment, for example, have much less, per student, to hand out. That means a student who would qualify for a Perkins loan at one school might not be offered one at another school. The federal Stafford and PLUS programs, on the other hand, treat all college students equally.
Luke Swarthout, higher education advocate for the U.S. Public Interest Research Group, said that while the Perkins program is imperfect, the declines are unfortunate because "it is a good program and helps a lot of students."