How Perkins Loans Work

The Perkins Loan program helps financially needy students pay for college, but how is it different from the other loan programs available? See more college pictures.
Lew Robertson/Getty Images

Paying for college is often the second largest financial commitment most families will make --purchasing a home generally comes in first. And just as mortgages are often relied upon to finance the American Dream, student loans can help make higher education a reality for prospective students who might otherwise lack the wherewithal to pay for college. In fact, two-thirds of students borrow money to pay for school [source: Dakss].

When it comes to student loans in the United States, the safest and most reliable resource is none other than the federal government.


The Federal Perkins Loan Program (begun in 1958 as the National Defense Student Loan, renamed in 1972 as the National Direct Student Loan, and then named for U.S. Rep. Carl D. Perkins in 1987) was created specifically to help students of exceptional financial need obtain a college education. Perkins Loans are government-funded and offered at a fixed interest rate of 5 percent, making the payback terms more manageable than many private loans and even some government-subsidized programs such as Stafford and Parent PLUS loans.

And though all three are based on need, Perkins Loans have several key differences. First, it is a campus-based program. So while the government funds these loans, the institutions themselves act as the lender and are in charge of distributing the money. This gives each of the more than 1,800 participating schools flexibility in determining which students will receive financial aid and how much they can get. Another user-friendly feature that sets Perkins Loans apart is that the government covers the interest of the loan while the recipient is in school, and during the grace period. The grace period is the time allowed, either from graduation or from the time the student falls below half-time enrollment, before the first loan payment must be made.

In the next section, we'll take a look at the application process and some of the factors that determine who qualifies for Perkins Loans.


Applying for a Perkins Loan

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 Loan Management

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.


Repaying a Perkins Loan

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.


Lots More Information

Related HowStuffWorks Articles

More Great Links

  • Dakss, Brian. "Student Loan Payback Strategies." CBS News (May 23, 2007)
  • Funding Education Beyond High School: The Guide to Federal Student Aid, 2009-2010. (February 21, 2010)
  • Kittredge, Betsy Miller. "A Landmark Investment in America's Economic Future." Committee on Education and Labor. (July 15, 2009)
  • McCluskey, Neal. "SAFRA Stinks: Why a student loan bill you've never heard of is so worrisome." (August 10, 2009)
  • Sallie Mae. "Federal Perkins Loans." (February 20, 2010)
  • Student Loan Network. "Federal Perkins Loan Program." (February 20, 2010)
  • U.S Department of Education. "The Federal Role in Education." (February 19, 2010)
  • U.S Department of Education. "The Federal Perkins Loan Program." (February 19, 2010)
  • U.S. Department of Education. "Your Federal Student Loans: Learn the Basics and Manage Your Debt."