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Perkins: Do We Liquidate, or Do We Wait?

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June 30, 2018 has passed, and according to Dear Colleague Letter 17-10, additional Perkins loan disbursements are now prohibited. Here are some factors to consider as your institution of higher education weighs the costs and benefits of liquidation.

Q: What is liquidation?

A: Liquidation is the process of assigning ALL loans to the United States Department of Education (USDE). Formal communication with loan borrowers and the USDE is required under liquidation.

Q: What does my institution forfeit by liquidating these loans, assuming all are accepted by the USDE?

A: Your institution will forfeit the institutional share of the cash related to these loans. This includes both the principal and interest portions of the loans.

Q: How can my institution calculate what would be forfeited, assuming all loans are accepted by the USDE?

A: Your net institutional capital contributions as a percentage of total net capital contributions would be forfeited. To calculate the net capital contributions, use the most recent FISAP filed or FISAP monthly report and look for the line items titled institutional capital contributions, refunds of institutional capital contributions, federal capital contributions, and refunds of federal capital contributions. The net is calculated by subtracting the refunds from the original capital contributions.

Q: Can my institution assign delinquent or defaulted loans (considered nonperforming) without beginning the liquidation process?

A: Yes; there is no requirement to begin the liquidation process to assign nonperforming loans. Our experience has shown nonperforming loans greater than five years typically do not provide a significant cash flow to the institution while the institution is still required to perform due diligence. Even if due diligence is performed by the loan servicer, often the costs outweigh the benefits on nonperforming loans. This may be true of nonperforming loans less than five years as well.

Q: What are my institution’s responsibilities if we wait?

A: You will continue to complete section III of the FISAP. This responsibility is relieved after liquidation has been officially completed. You also will be responsible for continuing to perform due diligence on all loans and completing reconciliations to the general ledger. If the servicer of the loans chooses to discontinue its service, you will need to secure a new servicer or service your own loans. Remember, any changes in servicers need to be reported to the USDE through an update to your Eligibility and Certification Approval Report (ECAR).

Q: What are the cash flow implications for my institution if we wait?

A: The USDE will calculate the excess cash on hand based on the completed FISAP and provide a formal letter requesting that cash be returned. This is an annual return. In addition, your institution will continue to:

  • Collect cash from performing loans;
  • Pay service fees to your servicer for its work; and
  • Pay staff for their time in completing reconciliations.

Q: What happens to the administrative cost allowance claimed from Perkins?

A: No more administrative cost allowance can be claimed from Perkins beginning with the 2018/19 year.

Q: Is Perkins really gone?

A: There has not been any specific guidance issued to mandate liquidation or complete closing of the Perkins program. The most recent official communication indicated no further extension of the Perkins program would be granted. As indicated in Dear Colleague Letter 17-10, the expectation is that Perkins loans will either be completely paid off, fully retired (such as loan forgiveness/cancellation), or assigned to the USDE.

Q: What else should my institution be considering here?

A: There are a few new pronouncements that are in effect or will become effective shortly. Not-for-profit Financial Reporting, Revenue Recognition, and Leases are three significant changes for institutions. We recommend analyzing the effects of each of these pronouncements in pro forma statements to determine the impact on the USDE Financial Responsibility Composite Score (FRS) along with consideration of Perkins liquidation and the removal of the correlating assets and liabilities. Clarifications on the FRS measurement are anticipated to be issued within the next few months to assist in addressing these new standards.

Q: Can CapinCrouse help with my institution’s analysis?

A: Definitely! Please email Dan Campbell, our Higher Education Services Director, at dcampbell@capincrouse.com, Lisa Saul, our National Uniform Guidance Director, at lsaul@capincrouse.com or Patricia Willhite, Senior Manager, at pwillhite@capincrouse.com.

Authors: Lisa Saul, National Uniform Guidance Director and Patricia Willhite, Senior Manager

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