Perkins Student Loans

The Perkins Loan Program provides low-interest loans to financially needy students at more than 3,200 colleges, universities, and other postsecondary schools. Since the program's inception in 1958, over $13 billion in loans have been made to 10 million borrowers, and over $1.5 billion in loans have been defaulted on, although the government is recovering some of that money. Of the more than 3,200 participating schools, 87 percent had operating costs and losses that exceeded their funds' income. Through June 30, 1989, cumulative operating costs and losses exceeded income by about $1.05 billion. Schools with high default rates have avoided funding restrictions by assigning their defaulted loans to the Department of Education. This allows them to maintain funding eligibility because the statutory formula used to calculate default rates excludes loans assigned to the Department--the rates are based solely on the loans held by the schools. A default rate formula that included assigned loans would help cut program costs because only schools with default rates below the statutory limits would receive more funding. GAO also identified several cost-reduction and revenue-producing alternatives, such as delaying loan disbursements or raising the loan interest rate, that could help the program become more financially sound. These alternatives are based on features of other federal student loan programs.

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.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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