Student loans are one of the fastest-growing categories of consumer debt in the United States. With more than 43 million borrowers, outstanding student loan debt is valued at over $1 trillion. The average debt per borrower is estimated to be around $33,500, according to savingforcollege.com.
Loans come in many different forms. Private loans are offered by banks and other financial institutions. Refinance loans are intended for people who have already graduated and have loans in repayment. Federal loans, on the other hand, are granted through government-subsidized loan programs. One of these was the Perkins loan—a program that began in 1958. If you still have a Perkins loan, here is what you need to know.
- A Perkins loan was financial aid subsidized by the federal government for post-secondary students who demonstrated exceptional financial need.
- Perkins loans must generally be repaid in the 10 years after graduation.
- Those who work in certain public-service occupations may be eligible to have all or a portion of their Perkins loan debt canceled.
- The government canceled the Perkins Loan Program in 2017.
What Is a Perkins Loan?
Offered through the federal government's Perkins Loan Program, a Perkins loan was a low-interest loan option made available to both undergraduate and graduate students who demonstrated an exceptional need for financial aid.
The program was started in 1958. Eligibility was determined based on information provided by the student on the Free Application for Federal Student Aid (FAFSA) form, and loans were granted directly from the school's financial aid office. This means that the school was the lender, with the government acting as the subsidizing body. Interest payments were made by the government while the borrower was in school.
About 500,000 loans were granted to students before the program expired on Sept 30, 2017. Final disbursements were made on June 30, 2018. The program was replaced by federal direct loans, often referred to as Stafford loans.
Repaying Your Perkins Loan
If you are still in school and attending at least half-time, you have nine months after you graduate, leave school, or drop below half-time status before you must begin repayment. If you are attending less than half-time, the Department of Education suggests checking with your school to find out the length of your grace period.
Perkins loans must typically be repaid in full within 10 years following the completion of the nine-month grace period. Students typically repay the loan directly to their school or to a designated loan servicer.
When it comes time to repay your Perkins loan, you may also have a number of other options. Your school's financial aid office or its loan servicing company can explain the options available in your case.
Deferment or Forbearance
If you're unable to start payments after the nine-month grace period, you can apply for deferment or forbearance to postpone repayment. If you have a Perkins loan from a previous school that's coming due—and you are still attending school at least half-time—you could be eligible for an in-school deferment.
If you work in a public service job—teaching, nursing, firefighting, etc.—you may be eligible to have all or a portion of your Perkins loan debt canceled after a certain period of time.
Your loan may also be discharged under certain circumstances. These may include personal bankruptcy, total disability, or death. You may also qualify for a discharge if your school shutters its doors.
Perkins loans can be eligible for repayments adjusted to suit your income level, but only if you consolidate them into a federal direct consolidation loan. The Department of Education cautions that "if you have Federal Perkins Loans and you are employed in an occupation that would qualify you for Perkins Loan cancellation benefits, you should not include your Perkins Loans when you consolidate."
If you're in an occupation eligible for loan cancellation, don't consolidate your Perkins loan into a federal direct plan.
There are four income-driven repayment plans, which differ slightly in their details:
- Revised Pay-As-You-Earn Repayment Plan (REPAYE): Under this plan, your payments generally amount to 10% of your discretionary income and are due over a period of 20 years for undergraduate loans and 25 years for graduate school loans.
- Pay-As-You-Earn Repayment Plan (PAYE): Again, payments are usually 10% of your discretionary income, but only up to your 10-year Standard Repayment Plan amount. This generally lasts for 20 years.
- Income-Based Repayment Plan (IBR): Payments are either 10% or 15% of your discretionary income and should not exceed your 10-year Standard Repayment Plan amount. The percentage depends on when you received the direct loan, as does the length of time you are required to make payments, which can be either 20 or 25 years.
- Income-Contingent Repayment Plan (ICR): With this option, your payments will be the lesser of 20% of your discretionary income or the amount you'd pay on a repayment plan with a fixed payment over 12 years, adjusted for your income. The repayment period with an ICR plan is 25 years.
With all four income-driven repayment plans, any remaining loan balance is forgiven once you've made the required payments for the required number of years. You can consolidate your federal loans and also learn more about the process using the Direct Consolidation Loan Application on the U.S. Department of Education's Federal Student Aid website.
The American Rescue Plan passed by Congress and signed by President Biden in March 2021 includes a provision that student loan forgiveness issued between Jan. 1, 2021, and Dec. 31, 2025, will not be taxable to the recipient.
Other Sources of Student Loans
Although the federal government canceled the Perkins Loans Program, it still offers other student loans for those who demonstrate a need for financial aid. Some of these include:
Direct Subsidized Loans
Like Perkins loans, direct subsidized loans are intended for students in significant financial need. The amount of the loan is determined by your school and cannot exceed that limit. The term subsidized refers to the fact that the Department of Education covers the interest payments while you are still in school just like the Perkins program. But there's one caveat—direct subsidized loans are available only to undergraduate students.
Direct Unsubsidized Loans
These loans are available to both undergraduate and graduate students regardless of financial need. Just like direct loans, the amount of your unsubsidized loan is determined by your school. But here's the difference between subsidized and unsubsidized loans—you are responsible for making interest payments even while you're in school. Any interest that is not made while you are in school or during the nine-month grace period after graduation is capitalized, which means it's added to your principal balance.
Direct PLUS Loans
This program is intended to act as financial aid for undergraduate, graduate, and professional students. Unlike the other two programs, the borrower is the student's parent. Students must be enrolled at least half-time for a PLUS loan. Money goes to the school to cover education-related expenses before any remaining funds are disbursed to the borrower.
Applying for Direct Student Loans
To apply for these direct loans, students and their parents must fill out the FAFSA form. Based on the information you supply, the FAFSA will determine your Expected Family Contribution (EFC) toward college or career school.
The schools use your EFC to decide how much federal aid to offer you. They do that by subtracting your EFC from their cost of attendance (COA), a number that includes tuition, room and board, fees, and related expenses.
Keep in mind, however, that beginning in July 2023 the Student Aid Index (SAI) will replace EFC on all FAFSA forms. In addition to some changes in the way the SAI is calculated, the change attempts to clarify what this figure actually is—an eligibility index for student aid, not a reflection of what a family can or will pay for postsecondary expenses.
To bridge the gap between your EFC and their COA, schools may offer you a package of financial aid that includes some combination of federal grants—known as Pell Grants—subsidized and unsubsidized direct loans, and paid work-study jobs. Like subsidized loans, grants are intended for students in significant financial need, but you don't have to repay them except in rare circumstances. Colleges may also offer other, non-federal aid, such as merit scholarships.