What it means
Perkins Loans were created to help students who could not afford the full cost of study. Unlike most federal loans, which come directly from the government, a Perkins Loan came from the school's own fund, and the school decided who received it and for how much.
Repayments went back into that fund to help future students. The loan carried a fixed interest rate of 5%, which was lower than many other student loans.
Borrowers received a grace period after leaving school or dropping below half-time study before repayments began, and the government paid the interest on subsidised loans while the student was enrolled. Some borrowers could have part or all of the loan cancelled for qualifying public service work such as teaching in a shortage area.
Congress allowed the programme to expire for new loans in 2017, with final disbursements possible in the following year. Students who need federal aid today use other federal loans, but millions of Perkins balances still exist and are serviced by schools or their agents.
A borrower with an old Perkins Loan should keep track of the servicer, because it may differ from the one handling other federal loans. For finance staff, the programme is a useful example of how subsidised lending works.
The interest rate was fixed in law and not set by the market, and the lender was an institution with a mission rather than a profit motive. The result was a cheaper loan for the borrower and a cost carried by the taxpayer and the school.
A nuance is that Perkins Loans can be consolidated into a Direct Consolidation Loan, but doing so changes the terms. The borrower may lose benefits specific to Perkins Loans, such as certain cancellation rights, so consolidation should be considered carefully.
In practice
Real-world examples.
Example
A nursing student with limited family income received a $4,000 Perkins Loan for one year. She borrowed at a fixed 5% and began repaying after her grace period ended. Her monthly payment was a fixed amount set at the start of repayment.
Example
A teacher with a Perkins balance worked in a school serving low-income families for five years. Under the cancellation rules, part of her loan balance was forgiven for each year of qualifying service. The school processed the cancellation and updated its records.
Example
A finance manager reviews a university's balance sheet and sees a line for Perkins Loans receivable. The loans are assets, but the manager notes that new lending has ended, so the balance will shrink as borrowers repay. The manager forecasts the run-off using the repayment schedules.
Formula
Calculation
Monthly payment = loan x r / (1 - (1 + r) ^ -n), where r is the monthly rate and n is the number of payments
Suppose a graduate owes $10,000 at 5% over 10 years. The monthly rate r is 5% / 12 = about 0.4167% and n is 120. The monthly payment works out at about $106.07. Total repaid is about 106.07 x 120 = $12,728, so total interest is about 12,728 - 10,000 = $2,728.Case study
Seen in the real world.
Lakeshore University is an illustrative, fictional college that managed a Perkins revolving fund of $12,000,000. Each year about $2,000,000 was repaid and lent again to new students.
When the programme stopped making new loans, the finance office had to plan for a fund that would no longer be refilled with fresh lending. Repayments of about $2,000,000 a year would still arrive, but they could no longer be lent out again to new students.
The bursar rebuilt the school's aid budget using other sources, and planned to fund scholarships from its own resources at roughly $1,500,000 a year. The illustrative lesson is that a revolving fund works only while new lending continues, and once it stops the school must replace the lost support. The university also wrote to existing borrowers to explain who would collect their payments.
Watch out
Common mistakes.
- Assuming a Perkins Loan is serviced by the same company as other federal student loans, when many are handled by the school or a separate servicer.
- Consolidating a Perkins Loan without checking which benefits, such as cancellation rights, might be lost.
- Believing that Perkins Loans are still available to new borrowers, when the programme stopped lending in 2017 and 2018.
Questions
People also ask.
Who was the lender on a Perkins Loan?
The school was the lender, using its own revolving fund of federal and institutional money.
What interest rate did a Perkins Loan carry?
It had a fixed rate of 5%, set in law rather than by the market. This was usually lower than commercial student loans.
Can a Perkins Loan be forgiven?
Some borrowers qualified for cancellation for particular public service jobs, such as teaching in a shortage area or military service, depending on the rules in force. Borrowers should ask the servicer which categories apply to them.
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