The Utility of Perkins Loans

While President Obama's proposal to end subsidies to private student loan companies may have been his boldest financial aid move in the budget, his proposal to expand the Perkins Loan program was the most surprising. Starting with Eisenhower, presidents have been trying to cut the Perkins Loan program and, given Obama's big moves on Stafford Loans and Pell Grants, I would have expected Perkins Loans to be on the chopping block in the 2010 budget.

Instead, the President is proposing to fix some longstanding inequities in the program, expand it, and use it as leverage to get colleges and universities to do other things he wants, like keep tuition increases low and give out more need-based financial aid. Perkins loans are unusual because colleges originate and service the loans using a revolving loan pool funded by the government -- colleges also get substantial discretion in deciding which "exceptionally needy" students get the loans. This discretion, combined with a distribution formula that results in wealthier, more expensive colleges getting more funds, make it a popular program among private colleges and universities.

Perhaps the President decided that, rather than fighting the higher ed establishment over cutting the program, he would use its popularity with some of the oldest and most influential campuses to leverage bigger changes in higher education. Not a bad trade-off, especially since the $1.1 billion Perkins Loan program is small relative to the $40+ billion Stafford Loan Program, but ultimately Perkins Loans are duplicative and don't help to simplify the complicated tangle of financial aid programs. And with other proposed changes in the budget, they won't even be the best loan deal for students anymore.

Used as an additional source of loan funds for the neediest students, Perkins loans have generally had the most generous terms of the three federal loan programs - the lowest interest rate at 5%, subsidized interest during school, and flexibility during repayment. But President Obama is proposing to eliminate the in-school interest rate subsidies and the Stafford Subsidized loan program will have a lower interest rate by the 2010 school year (4.5%) thanks to the Democrats' 2008 legislation cutting interest rates in half.

There are better ways to increase aid for low-income students than expanding the Perkins Loan program, including raising limits on the Subsidized Student loan program (now that it has a super-low interest rate) or using funds from cutting the Perkins Loan program to further increase Pell grants. The utility of expanding the Perkins Loan program isn't to provide more aid to students (there are better and easier ways to do that), the utility of the program is that it provides a point of leverage for the federal government among staunchly independent private (and public) colleges.