Pondering Perkins

Since 1958, the Federal Perkins Student Loan Program has been providing low-interest loans to needy students via campus-based revolving funds. More than 600,000 students (mostly undergraduates with family incomes under $30,000) receive a Perkins each year. The current Perkins differs from other federal loan programs, most notably the Stafford, because it is subsidized (the interest doesn't begin accruing until 9 months after graduation) and has a lower interest rate (5%, compared to the 6.8% Stafford).

The Student Aid and Fiscal Responsibility Act (SAFRA) would change the Perkins in some notable ways, not all of which are clear improvements. The proposed changes are rather intricate, and as I've spent a fair bit of time puzzling over them lately I want to bring some of my nagging questions to this wider audience in an effort to gain some insights and answers. (In full disclosure, the financial aid officer at my university, Susan Fischer, is a vocal opponent of the changes. I have listened to her views, and considered why UW-Madison might resist the changes. Of course, what I'm writing here are my own thoughts, not hers.) Don't get me wrong-- I am generally very supportive of this piece of legislation, which I do think will expand college attainment and improve the American higher education system. I raise these issues in the hopes that tinkering with a few details might make it more effective.

As I understand it, the Obama Administration has several goals for changing the program: (1) increase efficiency via a move to direct lending, (2) expand access by substantially increasing the dollars allocated, and (3) create incentives to keep tuition (and private loan reliance) down by changing the allocation formula (right now the institutional 'fair share' is based partly on tuition costs, and this is thought to contribute to rising tuition).

In a nutshell, goal #2 would appear to be achieved via accomplishing goal #1-- moving to direct lending enables the investment in Perkins to grow from $1 to 6 billion. Goal #3 would appear to be achieved with a new formula that distributes money to campuses based partly on how much non-federal aid they provide, whether they charge below-average tuition and fees, and enrollment of Pell Grant recipients. But what worries me are some of the proposed accompanying changes and plausible unintended consequences. In particular:

(A) In the new version, Perkins becomes an unsubsidized loan, rather than a subsidized one. This would make the Perkins akin to the Stafford, albeit at a somewhat lower interest rate. This makes the program more expensive for students (anyone who thinks even $500 a year in additional interest doesn't matter to the decisions of poor kids just isn't paying attention), and therefore less attractive.How does this enhance access?

(B) In the new version, a match is required from colleges, which they are interpreting as "pay to play." If they do acquiesce, they'll likely draw that money out of need-based funds, or through raising tuition. This would seem to work at cross-purposes with the intentions of the allocation formula, and again, not increase access.

(C) The new allocation formula is likely to benefit private not-for-profit 4-year colleges the most (for more on why, see this cogent analysis by Education Sector).

(D) Most troubling, I am told that another big change is coming with the new Perkins (though I admit, I cannot find evidence of this change in the current legislative language-- I expect it's to come in the rule-making): Packaging rules will require that Perkins be packaged after the Stafford. In other words, financial aid officers must first offer (and students must accept) the unsubsidized Stafford at 6.8% interest, before offering the 5% Perkins. This strikes me as a substantial barrier, likely resulting in few students even getting to the Perkins. Everything we know about loan aversion among low-income populations, and the unwillingness of some of the lowest-cost colleges to even offer their students loans points in this direction. Again, how does this enhance access?

Are there other ways to achieve the same objectives? In particular, is it absolutely necessary to end the subsidy, and change the packaging rules? Could savings be achieved, instead, by ending those abysmal TEACH Grants and perhaps sacrificing GRAD Perkins as well? It might also make sense to keep the subsidy and end the 9-month grace period.

In summary, before we effectively end a mean-tested program offering low-interest loans, have we thought through every alternative and pondered every possible unintended consequence? I realize Perkins may feel like small potatoes in the context of this big bill, but with every penny mattering to our students in this recession, I think the proposed changes to the Perkins deserve closer attention.