Unlike private loans, offered through lending institutions, or federal loans, such as the Stafford and Direct Loans; Perkins Loans are awarded to students with demonstrated financial need directly from their schools.
The Perkins Loans are initially funded through taxpayers dollars and continuously funded through a revolving system of repayment and disbursement. This means that if students default on their Perkins Loans payments, current students in need will not have access to funds.
As the default rate on Perkins Loans skyrocketed over the past five years, universities have struggled with funding loans for new students. This has resulted in several universities, including Yale and Harvard suing their students for default.
Photo Credit: enfi via Compfight cc
Why the Increase in Defaults?
Perkins Loans are offered to borrowers at an interest rate of 5%. This is lower than federal loan rates and, often times, much lower than rates offered by private institutions. In our current economic climate new graduates are finding it increasingly difficult to secure employment after graduation.
Many students report being under or unemployed. Having to face these financial difficulties, students often decide to focus their limited funds on repaying those loans with higher interest rates.
The Severe Consequences of Default
Graduates with Perkins Loans are offered a 90 day grace period after completion of their program before loan repayment must begin. At that point they are expected to begin making regular, monthly payments toward their loan debt.
Unlike federal loans, there are no programs in place for income based repayment plans on Perkins Loans. Struggling with other loan debt and without the option to pay a lower amount, many students go into default. At this point most universities have specific collection processes in place.
Typically, collection efforts will not begin until a student is over 120 past due on their account. This is when collection attempts begin. Universities either contract with private collection corporations or utilize existing personnel to attempt to collect the debt in several ways. They begin with phone calls to the borrower and letters.
When no response is received, they will begin contacting relatives or friends whose information the student provided upon signing the loan. These efforts will either end in the student successfully rehabilitating their loan or the university suing the student.
The Universities’ Stance
Schools are required by the federal government to make every effort to collect loan debt before resorting to collection and legal action.
Representatives from Yale insist that litigation is a last resort after repeated collection efforts. Yet, this school that is the second richest in the country, has open lawsuits against students in the New Haven courts. As of the 2008-2009 school year, Yale ceased offering Perkins Loans; offering instead other forms of financial aid.
Other schools have reported that Perkins loan debt is often not worth suing over. They typical Perkins borrower will have borrowed less than $4000 per year. Loan limits are $4000 per year for undergraduates and $6000 per year for graduates.
The costs associated with suing students in default are too great for this amount of money. Several universities have set up in-house collections processes and arbitrators in an effort to collect on more Perkins Loans without resorting to taking their students to court.
