Federal college aid programs are too complicated, so let this one expire

Lawmakers and college access advocates routinely charge that the federal government’s hodgepodge of programs to help students finance their educations are needlessly complicated.

The complexity causes students to waste time and resources. It also obscures prices, making it difficult for families to know ahead of time what college costs them. And, most troubling, complexity can trip up the students from low-income families that the programs are predominantly meant to help.

For a case study on how the system got this way — and the forces that align to keep it such — watch what happens to the federal Perkins loan program at the end of this month.

{mosads}The Perkins loan program is set to expire September 30th and unless Congress and the president act to extend it, the program won’t make any further loans to college students. As that date nears, colleges and advocacy organizations will argue that letting the program expire harms students, especially those from low-income families, who might otherwise turn to more expensive loans issued by private companies — or that these students just might drop out or not attend college in the first place.  

Before anyone gets the wrong impression here, the Perkins loan program, which issues just $1.2 billion a year in loans, is not the federal government’s main student loan program for undergraduates.

The main program is the William Ford Direct Student Loan Program, which issues $47.1 billion in undergraduate Stafford loans each year (yes, the program simultaneously carries the names of two former Congressmen). That program, which we will call Direct Loans for simplicity, provides loans directly from the Department of Education capped at $5,500 to $12,500 annually to any student regardless of financial need, at more favorable terms than private lenders offer. Unlike Perkins, the program is not under threat of expiration.

The Perkins loan program sits alongside Direct Loans, and students can only use it to top off Direct Loans up to an additional $5,500 per year after exhausting annual Direct Loan limits. Therefore, any student with a Perkins loan by definition has Direct Loans, too. That the federal government has two loan programs, one with a certain borrowing limit and another to circumvent that limit, is just the start of the complexity.

Unlike Direct Loans that students receive from the Department of Education and repay to the Department via a loan servicing company, Perkins loans are issued by the university a student attends, but with mostly federal funds. Students with Perkins loans repay their universities, or a third-party servicer the universities hire. Perkins borrowers therefore make payments to two different entities each month.

The university-as-lender model creates another issue. Because Perkins loans aren’t issued directly by the government, they don’t qualify for important repayment plans like Income-Based Repayment (IBR) available on Direct Loans. Unless, of course, the borrower knows to consolidate them after leaving school, in which case she’ll gain access to IBR, but will lose any special loan forgiveness features for Perkins loans, such as those for teachers, nurses, and firefighters.

To be sure, some borrowers might be better off forgoing that benefit to gain access to IBR and its loan forgiveness benefits, but others won’t and might not even know that they had given up certain benefits.

That, sadly, is not the extent of the complexity. Only certain colleges and universities are allowed to issue Perkins loan, and those schools can only issue the loans to some students.  That means it’s difficult for a prospective student to know in advance whether she will attend a school that issues Perkins loans, whether she would qualify, and whether her school would offer her a Perkins loan and how much.

This is hardly a transparent, reliable and fair system. Indeed, it is largely why Congress created what is today known as Direct Loans soon after establishing the predecessor to the Perkins loan program in 1958. Perkins was the first federal student loan program, but it limited access to loans because it relied on individual universities to set up their own programs partly with their own resources. Many did not participate, so lawmakers created the predecessor of today’s Direct Loan program to offer loans at all schools. They just never got around to ending the Perkins loan program.

Instead, they’ve maintained Perkins loans for fear that current students who depended on them this semester will be left in the lurch the next. There’s a simple solution for that issue. Allow those students to temporarily borrow higher amounts through the Direct Loan program until they finish their educations.

Lawmakers’ other concern about ending the Perkins loan program is that colleges and advocates, the same groups that complain about complexity, would say lawmakers callously ended a program that helps students pay for college.

Congress could blunt that criticism simply by raising the annual Direct Loan limits by $5,500, effectively letting all students access the additional funds that Perkins loans provide. They haven’t done that so far because they don’t want to be seen as increasing government lending, driving up tuition prices and further indebting students. So the two-program status quo has been the status quo for over 50 years.

Yet in a nod to its obsolescence, lawmakers have routinely set a future date at which the Perkins loan program should expire, only to kick the can down the road each time as that date arrives.

That date arrives again this month.

If lawmakers and advocates are serious in their concern that the federal student aid programs are too complicated and opaque, they’ll agree that it is time to let the Perkins loan program expire.

Jason Delisle is a resident fellow at the American Enterprise Institute, where he works on higher education financing with an emphasis on student loan programs.

The views expressed by contributors are their own and not the views of The Hill.