Federal Perkins Loan

A Federal Perkins Loan is a need-based federal student loan made by a participating college from a student loan fund the college maintained with federal capital contributions and its own matching money, under part E of title IV of the Higher Education Act. The statute names the program directly: "Loans made under this part shall be known as 'Federal Perkins Loans'." The school was the lender and, unless it later assigned the loan, remains the holder. Lending authority ended under 20 U.S.C. 1087aa(b)(2): "An institution of higher education shall not make loans under this part after September 30, 2017." The program survives only through its existing loans, which borrowers repay on the program's own terms.

The terms that still matter to a borrower. Under 20 U.S.C. 1087dd, a Perkins loan made on or after October 1, 1981 bears interest at 5 percent a year, and no interest accrues before the repayment period starts or during a statutory deferment. Repayment begins nine months after the borrower stops carrying at least half the normal full-time workload and runs up to ten years, and the borrower may prepay any part at any time. A school may require payments of at least $40 a month. Deferment is available for, among other things, further at-least-half-time study, up to three years of unemployment, up to three years of economic hardship, cancer treatment and periods of the very service that earns cancellation, and those deferment periods do not count against the ten-year repayment period.

Cancellation for service is the program's distinctive benefit. Section 1087ee(a) cancels a percentage of the loan for each complete year of qualifying service in listed fields, most of them full-time jobs. They include teaching in a school serving a large share of low-income children, special education, teaching in a shortage subject such as math, science or a foreign language, Head Start and licensed early-childhood staff, service in a hostile-fire area of the Armed Forces, Peace Corps volunteering or volunteer service under the Domestic Volunteer Service Act, such as VISTA, law enforcement, corrections and federal public-defender work, nursing and medical technology, child and family services for high-risk children, firefighting, faculty work at a Tribal College or University, and certain librarians and speech-language pathologists in Title I schools. For most categories the rate is 15 percent for each of the first two years, 20 percent for each of the third and fourth, and 30 percent for the fifth, which adds up to the whole loan. Head Start service cancels 15 percent a year, and Peace Corps and Domestic Volunteer Service Act service cancels 15, 15, 20 and 20 percent over four years. The interest that accrues in a cancellation year is cancelled too, and the statute provides that the cancelled amount "shall not be considered income" for federal tax purposes.

Who holds the loan now. Because the program is winding down, a Perkins loan may sit with the original school, often serviced by a contractor the school hires, or with the Department of Education. Federal Student Aid's 2024 guidance to schools says they may keep servicing their existing Perkins loans if they choose, must assign to the Department "any Perkins Loan that has been in default for more than two years", and, if they stop servicing, begin liquidating to close out the program. The regulation for a school that closes or leaves the program, 34 CFR 674.17, directs it to assign the outstanding loans to the United States. Schools still report their outstanding Perkins loans every month to the National Student Loan Data System, the Department's central loan database, so a borrower who is unsure where the loan is can start there.

The consolidation trade-off. A Perkins loan can be consolidated into a Direct Consolidation Loan, which pays it off with a new Direct Loan. That is the route into programs a Perkins loan cannot use on its own, such as Public Service Loan Forgiveness and the income-driven repayment plans. The cost is that the Perkins service cancellation applies only to Perkins loans, so it no longer reaches the consolidated balance, and the new loan carries the Direct Consolidation Loan's own interest rate and deferment rules instead of the Perkins ones. Leaving the Perkins loan out of a consolidation is an option.

A borrower with a Perkins loan repays the school or its servicer, or the Department of Education if the loan was assigned, on a schedule that starts nine months after leaving at-least-half-time study. A borrower who takes a qualifying job applies to the holder for cancellation after each complete year of service, and can ask for a deferment while serving so that no payments are due and no interest accrues in the meantime.

Consider an example. Ewan left school owing $6,000 on a Perkins loan and then taught special education full time. After his first and second years, 15 percent of the loan is cancelled each year, $900 each time. After his third and fourth years, 20 percent, $1,200 each time. After his fifth year, 30 percent, $1,800. $900 + $900 + $1,200 + $1,200 + $1,800 = $6,000, the whole loan, and the interest accruing in each of those years is cancelled as well. Had he consolidated the Perkins loan into a Direct Consolidation Loan after his first year, the $5,100 still owed would have become part of a Direct Loan, and none of the four remaining Perkins cancellations would have applied to it.

Pros

• Loans made since October 1, 1981 carry a fixed 5 percent rate, and no interest accrues during a statutory deferment.
• Service cancellation can retire the whole loan in five years of full-time work in a qualifying field, and the cancelled amount is not taxable income.
• Deferment is available during the same service that earns cancellation.

Cons

• The program is closed, so these terms are available only to people who already hold a Perkins loan.
• A Perkins loan on its own does not qualify for Public Service Loan Forgiveness or the income-driven repayment plans.
• Consolidating to reach those programs forfeits the Perkins cancellation for the consolidated balance.
• Holders vary as schools wind down, so a borrower may have to track whether the school, its servicer or the Department is responsible for the loan.