Closing out the Perkins Loan Program at Colleges and Universities
The Perkins loan program has quietly expired. Congress had until September 30, 2015, to legislate continuation of the 50-year-old, low-interest student loan program, but it let the deadline come and go without action. If you’ve heard rumors that some legislators are trying to rouse a response and keep the program alive, you can ignore them; it appears their efforts won’t get far.
Until the Department of Education (DOE) releases an official communication on closeout deadlines and expectations, most schools are just going to wait to see what happens, but others are looking to exit the program immediately. Understanding how the loans will be parceled out and what protocols you have to follow (including a mandatory independent audit within 45 days of shuttering Perkins) may help your school choose between acting now or taking advantage of some borrowed time.
All Perkins loans must be assigned or purchased
Every loan in the Perkins program with an outstanding balance must be accounted for in one of two ways: assigned to the DOE or purchased by the school. To decide, your school should begin taking an inventory of your loans and cleaning up your portfolio. The loans should be sorted into three categories: in default, in current repayment, or not yet in repayment. Each category should then be analyzed to determine how your school should best proceed.
Because defaulted loans will mean a loss in your finances if you are forced to purchase them, your preference obviously would be to assign these to the DOE. The DOE will be taking a risk on defaulted loans, so it will require each borrower’s promissory note, repayment history, and due diligence background before it will accept them. (Deceased students’ outstanding loans can be assigned to the DOE with a death certificate.)
Promissory note and repayment history
To assign a loan to the DOE, you must include a copy of the promissory note and the complete repayment history. If these documents are not included, the DOE will reject the loan. As you can imagine, this process will be tedious and time-consuming, so it may be wise to stop awarding new loans and collect on the existing loans for a few years before beginning the closeout process. This tactic will reduce the number of outstanding loans you ultimately assign to the DOE or repay with your institution’s funds.
Due diligence must have been performed on all loans you wish to assign to the DOE, with one exception: If your schools has a cohort default rate below 20 percent as of June 30 two years prior to the desired assignment date (e.g., June 30, 2013 for loans submitted by June 30, 2015), due diligence documentation is not required.
If your school’s cohort rate is 20 percent or greater, you must actually submit additional documentation supporting your due diligence activities, including:
- Letters contacting the borrower at 90, 150 and 240 days into the grace period
- 30-day notice to the borrower before the first payment is due
- Overdue notices
- Results from skip-tracing or equivalent institutional attempts
- Final demand notices
- Warning of notice of acceleration, credit bureau reporting, referrals to collection firms, and, if applicable, litigation documentation
Whether you plan to exit Perkins now or wait for later deadlines, your school should start these chores now to help spread out the imminent workload. Assignment of loans can be done at any time, even before you start your final closeout procedures.
Loans in repayment
Deciding whether to purchase loans in repayment or assign them to the DOE is a balancing act. The five-percent interest rate may be appealing, but many of these outstanding balances will ultimately call for collections activities (and the costs associated with them). On the other hand, gathering all the documents necessary for DOE assignment could be unwieldy and cumbersome as well, depending on how organized your records are and the age of many of these loans. But it’s not an all-or-nothing proposition; loans can be purchased or assigned on an individual basis. One strategy would be to purchase the loans with solid payment records and assign the remaining to the DOE.
Loans not yet in repayment
Loans not yet in repayment are probably the easiest to assign because the promissory note is the only necessary accompanying document. If your school has a low cohort default rate, however, you might want to invest in these loans and purchase them.
In fact, purchasing any of the three categories of loans should be viewed as an investment, and the actual return considered. The cost of purchase includes the cost of collections, whether via third-party services or internal staff. Payoff will be interest and fees. Similarly, consider the cost of assigning the loans, such as staff time in gathering all documentation and conducting due diligence. The payoff is unloading the burden of administration and collections.
The assignment process
Every process has a form: the Perkins Loan Program Assignment Form (OMB Form 1845-0048) will get you started on the fairly cumbersome assignment procedure. You’ll include a manifest of the loans you wish to assign, along with borrower information and due diligence documentation. (A cure process is available where the necessary supporting documents are lacking or missing.)
If and when the DOE accepts the loans, your school will notify the borrowers of the change and how to make repayments going forward. If a loan is rejected, your school has the option to correct the documentation and resubmit the loan for assignment. Failing that, you will have to purchase the loan and continue collections. In all cases, you will need to interface with the National Student Loan Data System (NLSDS) and inform them of assignments or purchases.
Once your school’s loan portfolio is cleared, you can begin the actual Perkins program closeout.
Independent audit of funds required
Within 45 days of terminating your school’s participation in the Perkins program, your must submit an independent audit of the Perkins loan funds. The 45-day clock starts ticking once you have communicated your intention to close out the program to the DOE and all outstanding loans in the portfolio have been fully retired, assigned and accepted by the DOE, or purchased by you.
The audit must be completed by an independent auditor. Look for an audit firm
that has experience with closeout audits, can guide your staff on all proper
procedures, and will ensure that you return the appropriate federal share back
to the DOE.
- Before you close out the Perkins loan fund, consider using any opportunity to draw administrative reimbursements as your institution is allowed.
- Be very persistent with the loan portfolio clean-up, as any higher risk loan you can assign is less of administrative cost burden on your school.
- Do not wait until you are nearing the sunset of your Perkins loan fund to act. As more time slips by, the more likely it will be that your institution must purchase loans you would rather assign.
- Coordinate with your auditor sooner than later so everyone is on the same page as to the processes and timing for your school.
How we can help
CLA’s higher education practitioners have performed many Perkins loan fund close-out audits in recent years. We know how to help you with your institution’s loan portfolio. Even if you are years away from performing your closeout procedures and required audit, we can help you plan and strategize now.