Shortage of Federal Perkins Student Loan Money to Affect 50,000 Students

Shortage of Federal Perkins Student Loan Money to Affect 50,000 Students

The amount of federal financial aid available to needy college students in the form of low-cost Perkins student loans is dwindling.

Funds are so low, U.S. News & World Report estimates that some 50,000 low-income students who would have been offered a Perkins loan last year won't be offered one this year.

And those who do manage to get a federal Perkins student loan will likely see their award amount shrink.

Shortage of Perkins Money Tied to Several Factors

Financial aid officers nationwide attribute the shortage of available Perkins money to the failure of federal funding for the Perkins program to keep pace with what has been a steady increase in college enrollment, writes U.S. News reporter Kim Clark (Why Perkins Loans are Harder to Get This Year, March 25, 2008).

Also contributing to the limited availability of funds is the fact that borrowers, faced with rising student loan interest rates over the past few years, have focused on repaying their other higher-interest student loans (http://www.nextstudent.com/student-loans/student-loans.asp)" like federal Stafford loans and non-federal private student loans (http://www.nextstudent.com/private_loans/private_loans.asp) first and are taking longer to pay off their Perkins loan debt.

Schools are each assigned a fixed pool of Perkins funds from which to lend. Unlike other federal college loans, which are paid back directly to the government or to lenders in the federal education loan program, Perkins funds are payable to the school, with schools dependent on that repayment money to generate new Perkins loans for incoming and returning students.

The longer alumni take to repay their Perkins student loans, the less money is immediately available to current students eligible for these student loans (http://www.nextstudent.com/).

The problem is further compounded by the fact that some students are able to discharge their Perkins loan if they go into the military or teaching, says Rick Shipman, director of the Michigan State University Office of Financial Aid.

As Shipman told the MSU State News, Their debts are forgiven by the federal government, but the federal government doesn't necessarily reimburse the school Credit Crunch Alarms Student Loan Lenders, March 26, 2008).

Schools Awarding Fewer and Smaller Perkins Student Loans

Faced with a scarcity of Perkins funding, officials at Ohio University estimate that 100 students who would have received $2,100 apiece in Perkins student loans last year won’t be getting them this year, a decline of 12 percent, Clark reports.

For its part, the University of Maryland at College Park says its Perkins funding this year has fallen to just half of last year's $2.3 million.

At Michigan State University, where $7 million worth of Perkins loans were issued to 6,600 of the school's neediest students during the 2007"08 academic year, only $5 million in Perkins funds will be available for the upcoming 2008"09 school year.

Due to the shortage of Perkins funds, MSU expects to award only about 4,400 Perkins students loans to undergraduates this year, reducing the average award from $1,200 to $1,000. The school eliminated Perkins loans for its graduate students last year.

A Blow to Low-Income Students

Perkins loans, awarded to students who are considered exceptionally needy, carry a fixed interest rate of 5 percent, one of the lowest rates among college loans (http://www.nextstudent.com/private_loans/private_loans.asp), and are subsidized by the federal government.

When federal student loans are subsidized, the government will pay any interest that accrues on those loans while borrowers are enrolled in school at least half time, in an authorized deferment period, or in the grace period they're given after leaving school before repayment begins.

Undergraduates can be awarded up to $4,000 a year in the form of a Perkins loan, and graduate students can receive up to $6,000 a year.

Between 2000 and 2005, an average of 725,000 students each year received a Perkins loan worth, on average, about $2,100, according to the U.S. Department of Education.

This year, however, the number of Perkins loans awarded, as well as the average award amount, is expected to drop back to levels last seen in the mid-1990s. U.S. News estimates that in the upcoming academic year, Perkins loans will be awarded to an estimated 670,000 students, each student receiving an average of about $1,500.

With less Perkins money available, low-income students who depend on financial aid to help meet their college costs may need to rely more heavily this year on other higher-interest student loans.

In a Credit Crisis, Finding Alternatives to Perkins Student Loans

Federal Stafford loans, which are available to students on both a financial-need and non-need basis, carry only a slightly higher fixed interest rate (between 6 and 6.8 percent) than Perkins loans. But dependent undergraduates are capped at a Stafford award between just $3,500 and $5,500, depending on their year in school " an award amount that may not be sufficient to cover the cost of a public four-year school, which averages over $13,000, according to the College Board.

If they've exhausted their federal financial aid options and still have education-related costs to meet, students may be able to turn to non-federal private student loans (http://www.nextstudent.com/).

Unlike Perkins loans, however, private student loans aren't subsidized; student borrowers will be responsible for all interest that accrues, even while they're in school. Private student loans also tend to carry higher interest rates than federal student loans and are typically variable-rate student loans, subject to interest-rate spikes.

And whereas federal Perkins and Stafford student loans are awarded without regard to a student's credit history, private student loans are credit-based college loans. Amid the current credit crunch brought on by the collapsing subprime mortgage industry, private student loans are becoming harder to obtain, particularly for students with low income or with little or no credit, as lenders tighten their lending requirements.