The federally subsidized Perkins loan fills a small but vital need in the mix of aid for college students. In Minnesota last year, 14,000 students borrowed an average of $2,400 each through Perkins. With a 5 percent interest rate and a low credit threshold, it's a welcome supplement for the neediest students.
"It is a crucial loan for low income students. It may be the only loan they can get," said University of Minnesota Office of Student Finance Director Kristine Wright. She offered Perkins loans to almost 1,700 students last year. This year no U of M students will get Perkins. That's because the loan relies on a revolving fund managed by each campus, and the university's Perkins fund is dry.
"They've gone from a high a couple of years ago of a repayment volume of about $6.5-million to less than $2-million now," Wright said. "We simply have to build up our revolving fund in order to have money to lend." The University of Minnesota is not alone. Perkins programs all over the country are scaled back or suspended. The main reason is a record-setting rush the past two years to consolidate student loans before interest rates increased. As students cashed in their Perkins loans, the loan funds ballooned. Then, by law, institutions had to loan all that money out again or forfeit it. They did, and now the institutions must wait for the borrowers to pay all that money back.
In the meantime, students relying on loans are left without a key supplement.
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"Many times there are not alternatives for those students, because there are annual limits on other types of federally supported loans," said Harrison Wadsworth, Director of the Coalition of Higher Education Assistance Organizations, which lobbies on behalf of student loans including Perkins.
Wadsworth said a freshman student might need more than the annual federal loan limit of $3,500 just to cover tuition. The Perkins loan could provide as much as $4,000 dollars more a year.
"The alternatives are purely private loans, however those require good credit or a co-signer with good credit," Wadsworth said. "So for students who lack either of those, Perkins loans is an option that's suddenly not available. So this is particularly going to hurt low income and middle income students who really need Perkins loans to cover all their tuition and fees this fall."
The Perkins loan started in 1958 as the National Defense Student Loan in reaction to Russia's launch of the Sputnik satellite. At the time, federal officials recognized a need to improve higher education access in order to remain globally competitive.
In 2005, President Bush proposed phasing out the program to direct more money into grants. So far Congress has not supported that plan, but the federal government is also not putting any new money into the system.
Perkins loans is an option that's suddenly not available
"As is often the case, we'll find out too late that there was a problem," Wadsworth said. "We'll find out this fall about students that had to change their plans, that they were unable to go to school or unable to go to the school they dreamed of going to."
The University of Minnesota is, by far, the largest distributor of Perkins loans in the state, but at least 42 public and private institutions participate in the program. Many financial aid officials are reluctant to talk about the loss of Perkins for fear of fueling a sense of doom for students looking for ways to cover the increasing costs of higher education.
Experts point out that students have many more low interest loan options. This month, Congress also passed a provision to increase the maximum annual amount for other federal loans.