How Perkins Loans Work

The first step for most students toward paying for school is the Free Application for Federal Student Aid, or FASFA. Most universities require students to fill out a FASFA before any decisions are made regarding financial aid, whether assistance comes in the form of merit-based scholarships or need-based grants or loans.

The primary function of the FASFA is so the U.S. Department of Education can calculate the student's Expected Family Contribution (EFC). The EFC helps determine eligibility for a range of government programs beyond Perkins, Stafford and Parent PLUS loans, such as Federal Supplemental Educational Opportunity Grants and Federal Work Study positions.

Factors considered when determining eligibility include the income and assets of students (and parents, if the student is a dependent) the size of the family and the number of family members that will attend college or another form of postsecondary education [source: Department of Education]. Once the FASFA has been processed, the applicant receives a Student Aid Report and the institution to which they are applying will receive an Institutional Student Information Record that includes the EFC information. Because schools have a finite amount of Perkins funding and it is distributed on a first-come, first-served basis, the application process should be completed as early as possible.

Now that you're familiar with the application process, let's explore what happens if you qualify.

Perkins Loans are awarded to students with the greatest financial need, up to $5,500 per year and $27,500 total for undergraduate students and up to $8,000 per year and $60,000 total (including amount borrowed as an undergrad) for graduate students. Also, instead of the borrower requesting a certain amount, the institution determines the award amount based on the amount the school has available to distribute and its own financial need criteria, using the EFC number. But need isn't the only requirement. Borrowers must also be enrolled in a degree program at least half-time and maintain satisfactory academic standing.

Once a student has filled out the paperwork and demonstrated adequate need, and the school has selected them to receive aid, he or she may be required to attend a Perkins Loan entrance counseling session before accepting the loan. This can usually be done online and consists of reviewing relevant material and answering a series of questions to ensure the borrower fully understands the terms of the loan, as well as the rights and responsibilities that come with acceptance.

The school will either credit the student's account or issue a check. The institution is required to distribute the award so that the student is paid at least once each term. For example, if a school year is divided into semesters, the student will be paid twice. If trimesters, then there will be three payments, and students attending school on the quarter system will receive four payments.

It's also important to remember, like most federal loan programs, the Perkins Loan must be reapplied for each academic year.

In the next section, we'll take a look at how to repay Perkins Loans.

As previously mentioned, the grace period associated with a school loan is the period of time after the student graduates, drops below half-time status or leaves school and before the first payment on the loan is due. With most loans, including Stafford and Parent PLUS, the grace period is usually six months. But with Perkins Loans, the grace period is usually 9 months -- extra time that can prove invaluable for new graduates establishing themselves after college.

Once the grace period expires, borrowers have up to ten years to repay the balance of the loan and any accrued interest. Remember, as a borrower, you don't have to pay interest while you are enrolled in school and during the grace period. The monthly payment depends on the amount of the loan and the length of your repayment period.

Of course, a lot can happen in ten years, and making a regular student loan payment may not always be feasible. To help mitigate unexpected events that might interrupt payment, borrowers can request a temporary lowering or suspension of their monthly payment. For example, if a borrower is in school or in the grace period when called to active duty in the military, the lender is required to maintain the status of the loan for the duration of the assignment, up to three years. If the borrower has already started paying back the loan, then the lender is required to grant forbearance, which is essentially putting payments temporarily on hold [source: Student Loan Network]. Similar terms apply for Peace Corps service and economic hardships. Borrowers should consult their universities for details since programs may vary between institutions.

And don't forget about student loans when it comes to filing taxes. Interest paid on federal and non-federal loans for higher education may qualify you for a maximum deduction of $2,500 per year [source: Student Loan Network].

Finally, a Perkins Loan will be canceled if the borrower dies or becomes permanently disabled. There are other situations in which a Perkins Loan may be forgiven, which are discussed in the sidebar on this page.

Learn lots more about Perkins and other student loan options by visiting the links on the next page.