Perkins Student Loans:

Options That Could Make the Program More Financially Independent

HRD-92-6: Published: Dec 9, 1991. Publicly Released: Dec 9, 1991.

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Pursuant to a congressional request, GAO provided information on the financial independence of the Department of Education's Perkins Student Loan Program.

GAO found that: (1) of the 3,230 participating schools, 419 had Perkins program revolving funds in which income exceeded operating costs and losses, and the remaining 2,811 schools' operating costs exceeded their funds' income; (2) through June 30, 1989, cumulative operating costs and losses for the 3,230 schools exceeded income by about $1.05 billion; (3) new federal and school capital contributions have been used, in part, to make up operating losses as well as to increase funds available for loans; (4) since the statutory formula used to calculate default rates excludes loans assigned to Education, schools with high default rates have avoided funding restrictions by assigning those loans to Education; (5) options for reducing default costs include delaying the disbursement of Perkins loan proceeds to students until the school term is partially completed and requiring schools with high default rates, in instances in which their students withdraw from school, to provide refunds to borrowers in proportion to the percentage of the school term elapsed and apply refunds toward the repayment of students' Perkins loans; and (6) options for increasing Perkins program income include raising the current 5-percent interest rate on Perkins loans and charging Perkins loan borrowers a loan origination fee to help cover defaults and other operating costs.

Matters for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: The reauthorization of the Perkins Student Loan Program, through the Higher Education Amendments of 1992, did not include the GAO recommendation. It appears that Congress will not act on it in the forseeable future.

    Matter: Congress may wish to consider additional alternatives to increase revenues; those options, however, would require student borrowers to absorb more of the costs. Those options are to: (1) increase the interest rate Perkins loan borrowers pay; and (2) charge borrowers a loan origination fee.

  2. Status: Closed - Implemented

    Comments: The Higher Education Amendments of 1992, Public Law No. 102-325, established section 484B in the Higher Education Act requiring a uniform school refund policy which includes pro rata refund provisions.

    Matter: To make the Perkins Loan Program more financially sound and less reliant on additional capital contributions, Congress may wish to consider requiring schools with high default rates to provide pro rata refunds to borrowers who drop out of school before the scheduled completion of their period of enrollment and to apply the refunds toward the repayment of their Perkins loans. The amount of a borrower's refund should be in proportion to the amount of Perkins loans borrowed when compared to funds borrowed from all sources.

  3. Status: Closed - Not Implemented

    Comments: The reauthorization of the Perkins Student Loan Program, through the Higher Education Amendments of 1992, did not include the GAO recommendation. It appears that Congress will not act on it in the forseeable future.

    Matter: To make the Perkins Loan Program more financially sound and less reliant on additional capital contributions, Congress may wish to consider requiring schools to delay for 30 days the disbursement of Perkins loan proceeds to first-time borrowers.

  4. Status: Closed - Implemented

    Comments: The Higher Education Amendments of 1992, Public Law No. 102-325, revised sections 462(g) and (h) of the Higher Education Act to require the use of cohort default rate for Perkins loans, similar to the one for Stafford loans.

    Matter: To make the default penalties more effective in limiting the distribution of federal funds to schools with high default rates and thereby more effective as tools for reducing the program's default costs, Congress should revise the Higher Education Act, as amended, to require that Perkins loan default rates be computed on a basis similar to that used for the Stafford loan program.

  5. Status: Closed - Not Implemented

    Comments: The reauthorization of the Perkins Student Loan Program, through the Higher Education Amendments of 1992, did not include the GAO recommendation. It appears that Congress will not act on it in the forseeable future.

    Matter: To ensure that the benefits of Education's additional collection methods on defaulted loans are maintained if the default rate formula is revised, Congress should further revise the Higher Education Act to require that schools assign their defaulted Perkins loans to Education for collection after they have been in default for a specified period, such as 2 years.

 

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