The History of Student Loans

Today, student loans are an integral part of the college experience. With the rising cost of college, fewer and fewer students are able to afford tuition expenses alongside room and board and textbooks all on their own. Instead, 70 percent of college students are graduating with student loan debt in 2018. However, this hasn’t always been the financial landscape of education. In the past, there were fewer students with student loan debt, and college was generally cheaper than it is today. However, access to college was more limited by a student’s available finances.

Early Student Loan Legislation: The GI Bill and Higher Education Act

The GI Bill

In 1944, the wars in the Pacific and in Europe were being won, and it was clear that an end to World War II was near. In order to make sure that returning soldiers were treated as heroes, and given the tools necessary to return to civilian life, Congress passed the G.I. Bill, one of the most impactful legislative achievements of all time. Among other things, the bill offered financial assistance to veterans of the U.S. armed forces who wanted to attend college following their discharge from the military. Although the assistance to veterans did not come in the form of loans, it is a landmark in the history of education in the United States. The G.I. Bill made college a real possibility for the working class, rather than an institution for the children of rich families.

The National Defense Education Act (NDEA)

The next major piece of legislation in connection with student financial aid was the National Defense Education Act (NDEA), which was passed in 1957 in response to the Soviet space program. The NDEA was intended to promote the scientific superiority of the United States over the Soviet Union by making college more accessible to students from middle class families, especially if those students studied math and science. The NDEA was also the first attempt by the federal government to insure loans for college students.

The Higher Education Act of 1965

Finally, the keystone of early student loan legislation was the Higher Education Act of 1965. This piece of legislation expanded access to student loans by providing federal money to banks and other private lenders in order to facilitate student loans with low interest rates.  The Act has undergone many changes over the years, but it remains an important part of the financial aid system in the United States.

The Student Loan Reform Act and FAFSA

The early history of student loans was about expanding access to education — making it available to everyone and not just those able to afford the upfront costs. Later reforms would try to further polish the ways in which the federal government provided assistance to students who did not have the financial means to pay for college.

The Creation of FAFSA

In 1992 the Higher Education Act was amended to create the Free Application for Federal Student AID — more commonly known as FAFSA. FAFSA allowed the Department of Education to more systematically analyze each student’s financial need and award financial aid in accordance with that need. This streamlined student loans by making sure that the students who were most in need of them had greater access.

Expansion of Direct Loan Programs

In 1993 congress passed the Omnibus Budget Reconciliation Act of 1993. Among many other things, the act tried to expand the direct loan program. Direct loans are student loans that come directly from the Department of Education.

Although a 1994 bill ended up postponing the switch to direct loans, President Obama would make all federal loans into direct student loans in 2010. This effectively created two types of student loans: federal student loans funded and operated by the Department of Education and private student loans, which are provided by private lenders such as banks and credit unions.

The Present Day: Rising Student Debt

Before the turn of the century, student loan reform was aimed at expanding access to higher education and making the financial aid system more efficient. However, the student loan issues of the 21st century are focused on resolving the student loan debt crisis. Although student loans have made college accessible to many more students, student loan debt is getting the reputation of being more of a long term-burden than an investment in a person’s future.

Revised Pay As You Earn (REPAYE)

Income-based repayment plans are not new for student loans, but in 2015 the government changed the program to become Revised Pay As You Earn (REPAYE). This program is meant to help college graduates more easily handle their federal student loans by calculating monthly payments relative to a borrower’s income. The intended benefit of the program is that student loan payments will have a smaller impact on a college graduate’s income month over month, but smaller payments also mean that it takes longer to pay down a student loan balance. REPAYE also ties into some student loan forgiveness programs, allowing students to have some or all of their remaining student loan debt forgiven after a certain number of years under a REPAYE plan.

Why Is Student Debt So High?

The paradox of student loans is that they are partially to blame for the high cost of college today. College administrators have learned that the demand for a college education is so high that they can charge any amount in tuition and fees and expect student loan distributions (often insured by the federal government) to help match that amount. In short, the more federal financial aid becomes available, the more the cost of college increases to match it.

Colleges are also finding the modern academic environment much more competitive. College campuses are always trying to find new ways to lure students and beat their competitors, whether it’s with new buildings, world class professors, or cutting edge technology. However, all of these perks cost money and that cost is passed down to the student in the form of higher tuition and fees.

The Future of Student Loan Debt

To many college graduates and current and prospective students, it is clear that student financial aid cannot remain on the same path. Something must be done to minimize the impact of student loan debt and make college truly affordable once more. Here are some solutions to the student loan debt crisis that have been proposed:

• Expanding student loan forgiveness. Student loan forgiveness is one of the best programs available for people who don’t want to continue paying down their federal student loan balances into retirement. Expansion of this program would increase the availability of forgiveness for student loan debt and could be used as an incentive to draw college graduates in high value career fields.
• Lower interest rates on student loans. Currently, interest on federal student loans is determined at a fixed rate by the Department of Education, depending on a variety of economic indicators and the types of loans being distributed. Lower interest rates would help college graduates spend less money on their student loans in the long run.
• Cancelling all student loan debt. It’s a long shot, but some student advocates have proposed cancelling all existing federal student loan debt. This option may seem promising to some because, while student loan reforms may help the next generation of college students, graduates with existing student loan debt don’t want to be left out in the cold. Proponents of student loan debt cancellation also argue that such a move could stimulate the economy by freeing up Millennials to spend more rather than focus on paying down their debt.

Historically, the introduction of student loans to the United States higher education system has been a massive success. Student loans and other forms of financial aid have made college more accessible than ever. Today, policymakers are working to lessen the burden of student loan debt on college graduates and keep college affordable for students of all backgrounds.