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.