student loan history

A Brief History of Student Loans

The oldest university in the world, Morocco’s University of Karueein, has been instructing students for nearly 1200 years, a full 250 years before England’s Oxford University gave out its first sheepskin.  Up until the end of the Renaissance, universities served as the training grounds for priests, the guardians of all learning for much of history, and students didn’t need to pay to learn because the costs were covered by a sponsor.  Today, the role of the university and the student has drastically changed, especially because sponsorship has been replaced by student loans and the costs have been put on the shoulders of the learners themselves.

This trend continued for hundreds of years until universities expanded their student bodies and began preparing students to be professionals in areas like law and medicine.  In 1796, Thomas Jefferson attempted to make university education subsidized by the state; while the effort failed, cost-free primary education began just 20 years later. By this point in the 1800s, university students were no longer expected to become priests, and no longer exclusively male, but still relied on wealthy families paying the way.  By 1840, Harvard University broke a new barrier by being the first university to offer loans for its students to fund their studies.  The cost of a year’s education at Harvard was less than $150, but during this same time an average worker might only expect to earn about a dollar a day.

University education remained in the hands of the rich elite until the aftermath of World War II.  With millions of soldiers returning to start a new life, the federal government instituted the GI Bill, which covered the costs of a degree and opened up higher education to the masses; half of all students enrolled in university from 1945 to 1950 were former soldiers.  While this initiative is credited with helping to create the American middle class as we know it today, it still wasn’t enough to push American university graduates to the level of other nations.  In 1958, with the Cold War dominated government priorities and politicians fearing that the Soviet Union could overtake the United States’ technological superiority, the National Defense Education Act provided loans as well as grants and scholarships to promising students in math, science, and engineering,

Seven years later, the Higher Education Act made education grants available to students from low-income backgrounds.  It also provided financial institutions with the framework to offer loans at very low interest rates.  Further initiatives to help students from poor families attend college, such as the Pell Grants, followed.  By 1972, 50% of high school graduates went on to college, with grants and scholarships covering 80% of the total costs.  While many families still could not afford to send their children to college, the costs of a university education in the 1970s were very low relative to today’s costs.  Adjusted for inflation, a student could attend all four years at a university for less than the cost of just one year at a university today.  By 1975, however, the costs of college began to rise drastically, starting a trend where tuition rose at a faster rate than inflation.

During the 1980s, laws dealing with the process of repaying student debt began to materialize.  The Bankruptcy Amendments Act of 1984 made it possible to discharge student loan debt on the condition that the student is associated with a nonprofit organization.  Two years later, the length of time needed for a debt to be declared in default changed from 120 days to 180 days, with a 90 day claim period.  Federal Stafford Loans, Supplemental Loans, and Federal Consolidation Loans became prevalent by the late 1980s.

The Higher Education Amendments of 1992 paved the way for major change by adding unsubsidized Federal Stafford Loan options and creating FAFSA.  The government used a new need-based formula to expand these loans to more middle-class Americans, one of the largest initiatives contributing to the flood of student loans taken out in the past 25 years.  One year later, the Student Loan Reform act made it possible for the federal government to provide loans directly to students, rather than through a private lending agency.

By this point, student loan debt had begun escalating.  In 1996, the government passed laws garnishing Social Security wages for those who had outstanding federal student loan debt.  Later, interest rates were capped at 8%.  By 1998, school teachers earned debt forgiveness after working in public schools for a period of time.  Perhaps most critically, the Higher Education Amendment Act of 1998 made it impossible to discharge student loans in bankruptcy after seven years’ insolvency, a change that has created tremendous controversy and limited the ability of debt holders to escape their financial woes by declaring Chapter 11.

The 2003 Servicemembers Civil Relief Act made it more affordable for military veterans to attend college, capping interest rates for active-duty members at 6% and adding military deferment for up to five years.  In 2005, PLUS loans became available for graduate students.  The 2008 Higher Education Opportunity act made it mandatory for loan repayment status to be available to all three major credit bureaus.  At the same time, the 2008 recession meant that private lenders began to back out of federally subsidized loans, limiting the lending avenues available to students.  The government responded by creating the Consumer Financial Protection Bureau and eliminating the fixed interest rates on federal loans.  By 2010, American student debt eclipsed credit card debt for the first time in history; just two years later the national student loan debt also increased past the point of national auto loan debt, as total student loan debt passed one trillion dollars.