Archived Information

Reauthorization of the Higher Education Act


Part E--Federal Perkins Loan Program

Section 461. Section 461 of the bill would amend section 461(b) of the Act to extend the Federal Perkins Loan program through fiscal year 2003 by providing for $60,000,000 for fiscal year 1999, and such sums as may be necessary for each of the four succeeding fiscal years. In addition, section 461of the bill would extend, through October 1, 2003, the authorization of appropriations to enable students who previously received Perkins Loans to obtain additional Perkins Loans in order to continue or complete their courses of study

Section 462. Section 462(1) of the bill would amend the institutional allocation formula in section 462 of the Act. Under current law, the annual appropriation for each of the three title IV, HEA "campus-based" programs--the Federal Supplemental Educational Opportunity Grant (FSEOG), Federal Work-Study (FWS), and Federal Perkins Loan programs--is distributed to institutions according to a two-part statutory formula. The first part, the "base guarantee", considers a school's program expenditures in a previous year. The second step in the current allocation formula, based on institutional need for additional funding, allocates the amount remaining after the base guarantees are fully funded by providing one­fourth of the remaining amount to institutions on a pro rata basis (the "pro rata increase"), and three­fourths to institutions based on the institution's need (the "fair share increase"). Additional funding under the second step in the allocation formula is generally available if the annual appropriation is sufficient to fund the full amount to which each school is entitled in step one. That is, all institutions are first "held harmless" to prior funding levels. Two statutory formulas--one for FSEOG and a second for FWS and Perkins Loans--measure institutional need (the Perkins Loan formula also currently reflects an institution's default experience). This formula essentially aggregates individual student financial need to institutional levels based on national standards. Aggregate institutional need drives the second part of the institutional allocation process.

Since 1986, an institution's base guarantee has been the principal determinant of its current-year allocation. For most schools, the prior year expenditure is linked to its program participation in the 1970's. Thus, today's allocation of campus-based funds largely reflects a 20-year-old distribution of program funds.

The current allocation formula is inequitable because growing schools cannot increase their funding, and other institutions' funding levels are largely protected. Virtually all appropriations for the entire Perkins Loan program are distributed under the base guarantee each year, and have been distributed this way for many years. Due to the base guarantee, schools with declining enrollments have not necessarily experienced a corresponding decline in campus-based funding. Conversely, schools with increasing enrollments, and populations of needy students, have not received a corresponding increase in campus-based funding.

Section 462 of the bill would modify the institutional allocation formula so that increasingly larger shares of program appropriations would be distributed on the basis of measured financial need. By shifting the distribution of program funds toward relative institutional need, the campus-based programs will better meet the needs of financially needy students. However, to avoid disruption that could be caused by dramatic shifts in program funds between institutions, the amendment would ensure that no institution's allocation would be reduced by more than five percent compared to the prior year. Next, sections 462(2) and (3) of the bill would eliminate section 462(b) of the Act, which provides for the allocation of one fourth of the available funds to institutions on a pro rata basis, make a conforming change, and limit the allocation of excess eligible funds to 2-year and 4-year programs of instruction, for which the institution awards an associate, or baccalaureate degree. The pro rata increase is a needless complication in the formula.

For most institutions, the base year for prior program expenditures would be the second year preceding the academic year for which allocations are being determined. For example, academic year 1999-2000 allocations would be based on academic year 1997-98 program expenditures for those institutions that participated in that year. Base guarantees for institutions that began participating at a later date would be computed similar to current law. Unlike current law, however, an institution's base year would continue to move forward each year, which would "lock in" any annual funding an institution gains for the future and also helps ensure that no school receives less than a specified percentage of its previous year funding.

For the first year that the proposed amendments to the allocation formula would be in effect, the base guarantee percentage would be 100 percent. That is, no school would receive less than 100 percent of their base year program expenditures. Thereafter, the base guarantee percentage would be 95 percent of the preceding year's amount. In order to achieve comparability and uniformity among the campus-based programs, each eligible institution that began participation in the Perkins Loan program after fiscal year 1985 but is not a first or second time participant, will have a base guarantee of 95 percent, instead of the current base guarantee of 100 percent.

Section 462(4) of the bill would amend section 462(d)(4) of the Act to provide that when the Secretary establishes income categories for aid applicants to determine an institution's need, for purposes of calculating a fair share under the allocation formula, the Secretary would no longer be required to establish an expected family contribution for each income category. This change would reduce the administrative burden on institutions, which must currently add several items on the output documents in order to comply with the requirement even though the official EFC is already indicated on these documents. These changes would provide flexibility so that the Secretary can continue to collect information that is not available elsewhere and derive the EFCs needed for the allocation formula. A similar change to the FSEOG program is proposed in section 415(4) of the bill, and to the FWS program in section 442(4) of the bill.

Section 462(5) of the bill would amend section 462(f) of the Act to remove outdated provisions. For purposes of calculating reductions in allocations based on cohort default rates current law would be retained, but would be amended to add a provision to mandate the loss of eligibility for an institution participating in the Perkins Loan program if its cohort default rate is equal to or greater than 25 percent for each of the three most recent fiscal years for which data are available. This proposed elimination of eligibility is similar to FFEL provisions, as amended by this bill.

Section 462(6) of the bill would amend section 462(g) of the Act to remove outdated provisions, and to add language to section 462(g) clarifying that the reference to the "maximum cohort default rate" in that section is for purposes of default reduction and default penalties. Section 462(7) of the bill would also remove outdated provisions from section 462(h) of the Act, and would add to that provision a definition of "loss of eligibility" as the mandatory liquidation of an institution's revolving fund, and assignment of an institution's portfolio to the Secretary. This would provide a powerful incentive for institutions to keep their Perkins Loan program cohort default rates low and to improve their administration of the program, especially with respect to loan collection. This would lead to increased protection for students and taxpayers, and would improve the integrity of the Perkins Loan program.

Finally, section 462(8) of the bill would amend section 462(j) of the Act to combine all returned funds from all of the Federal campus-based programs, and reallocate them according to the current reallocation rules for the FWS program. Institutions would only receive reallocated funds if they have spent at least ten percent of their FWS allocation on community service. Additonally, they must spend all of the reallocated funds for community service. Section 462(j) of the Act would retain the current allocation reduction provisions for an institution returning more than 10 percent of its allocation. This amendment would simplify the reallocation process for institutions, and for the Department, and would put more funding into the community service component of the FWS program. The effect on the FSEOG and Perkins Loan programs, however, would not be significant, in that most nearly seventy-five percent of returned funds are already in the FWS program funds. A similar change is proposed to the FSEOG Program in section 415(5) of the bill.

Section 463. Section 463(1) of the bill would modify section 463 of the Act to eliminate the Expanded Lending Option (ELO) that allows certain schools to award higher annual and aggregate loan amounts in award years in which they contribute to their Perkins Loan fund an amount at least equal to the Federal contribution for that year.

This amendment would simplify the Perkins Loan program for institutions, as well as for the Department. There are currently fewer than 100 schools participating in ELO. The current law is inequitable in that it bases the ability of a school to award higher amounts on its matching of Federal contribution. Therefore, a school with a small Federal share might easily provide the full match, and receive the benefits of the increased maximums, while a school with a large Federal share might not have that ability. The total Perkins Loan allocation might be the same at both schools,, and both schools' students, regardless of the Federal share, have need. Additionally, by increasing loan maximums for all schools, the flexibility in aid packaging currently enjoyed by ELO schools would be available to all schools.

Section 463(2) of the bill would amend section 463(c) of the Act to eliminate the prohibition on reporting defaulted Perkins Loans as negative credit information beyond seven years. Instead, credit bureaus would be required to continue to report negative information received from the institution that made the loan, or the Secretary, until the loan is paid in full. In addition, the amendments would provide authority for the Secretary to develop appropriate criteria to allow institutions to cease voluntarily the reporting of negative information before a loan is paid in full. Finally, section 463(c) of the Act would be clarified regarding what information institutions are required to provide to credit bureaus, and other stylistic changes would be made. These amendments would provide consistency between the statute of limitations for collecting loans and the period for reporting negative credit information. The reporting of defaulted loans to credit bureaus is an effective and important tool that should be available for the entire time that the Department is able to collect on the loan. Similar changes are proposed for the FFEL program in section ___ of the bill.

Section 464. Section 464(1) of the bill would make conforming amendments to section 464(a) of the Act, to eliminate special ELO maximums, and increase regular loan maximums, consistent with the amendments in section 463(1) of the bill, discussed above .

Section 464(2) of the bill would amend section 464(b) of the Act to remove the requirement that an institution make at least 5 percent of its Perkins Loan funds available to independent and less-than-full-time students, if such students account for at least 5 percent of the total financial need of all students attending the institution. This requirement causes an administrative hardship, because institutions must keep track of the students to whom they offer aid, based on these artificial categories, and carry out additional calculations and reporting on students in these categories. Furthermore, many institutions are far exceeding the 5 percent minimum for these categories of students, not just in offers, but in actual expenditures. Instead, the current law requirement that funds be reasonably available to all eligible students in the institution in need thereof, would remain in effect without the additional 5 percent limitation. This change will remove the administrative burden, while still enabling the Secretary to take action against those few institutions that do not make funds reasonably available to all students, including independent and less-than-full-time students. A similar change is proposed to the FSEOG program, in section 414(2) of the bill, and to the FWS program, in section 442(4) of the bill.

Section 464(3) of the bill would amend section 464(c)(1) of the Act by adding a new subparagraph (H) to define "default." For all Perkins Loans made on or after July 1, 2000, default would be defined as 180 days past due if the loan is repayable in monthly installments, or 240 days past due if the loan is repayable in less frequent installments. This change would be consistent with the definition of default in the FFEL program, eliminating disparities among similarly situated borrowers in the two programs.

Section 464(4) of the bill would amend section 464(e) of the Act to provide the same general forbearance provisions to borrowers under the Perkins Loan Program as are currently available to FFEL and Direct Loan borrowers. This would eliminate disparities among similarly situated borrowers who have loans from different programs, and would reduce confusion for borrowers who have both Perkins Loans and FFELs.

Section 464(5) of the bill would amend section 464 of the Act by adding a new subsection addressing closed school discharges in the Perkins Loan Program, and by adding a new subsection on the rehabilitation of Perkins Loans. Proposed section 464(g) of the Act would eliminate this inconsistency and add to the Perkins Loan Program comparable discharge provisions as those that currently exist in the FFEL and Direct Loan Programs. Both the FFEL and Direct Loan programs include provisions, intended to protect studetns, that set the standards for the discharge of FFEL and Direct Loans for students who were attending a school that closed. The lack of a similar provision in the current law for the Perkins Loan program means that a student who attends a school that closes is able to have his or her obligation on a FFEL or Direct Loan discharged, but cannot do the same for Perkins Loans.

Proposed section 464(h) of the bill would address the rehabilitation of Perkins Loans. The Act currently contains no authorization or procedures for loan rehabilitation in the Perkins Loan program. Section 464 would establish a rehabilitation program for Perkins Loans that has the same general terms and conditions as the rehabilitation programs in both the FFEL and Direct Loan Programs. Loans would be rehabilitated after twelve on-time, consecutive, monthly payments, and at that time, the default would be removed from the borrower's credit history. Additionally, defaulted Perkins Loan borrowers would be able to renew eligibility for student aid by making six on-time, consecutive monthly payments. Borrowers could rehabilitate the loan and renew eligibility for student aid only one time each. In the Perkins Loan program, the institution, in its professional judgment, would determine what repayment amount would be reasonable and affordable for the borrower.

Authorizing such a rehabilitation program for Perkins Loans would provide a tool for institutions and servicers to return defaulted loans to repayment. It would also provide motivation for borrowers to repay their loans and for institutions to encourage defaulters to repay, because borrowers would have their bad credit erased, and rehabilitated loans would be removed from an institution's cohort default rate.

Section 465. Section 465 of the bill would amend section 466 of the Act by removing the date for mandatory liquidation of Perkins Loan funds, and replacing it with a general authority for the Secretary to implement liquidation procedures upon the expiration of the authorization for the Perkins Loan Program. A fixed date for the liquidation of Perkins Loan funds at each institution creates unnecessary problems if reauthorization does not occur before that specific date. This amendment would provide institutions with adequate lead time to liquidate the funds, should it become necessary.

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Last updated: April 4, 2002 by [pss]

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