Student loans

The complete history of student loans

Americans must collectively over $1.74 trillion in student loan debt – a number that keeps rising as tuition costs continue to rise. Not only that, but a recent Bankrate survey found that 70% of millennial and Gen Z borrowers have put off major milestones, like saving money for retirement, paying off high-interest debt and buy a house, because of their student loans.

The current state of student loans is the result of many years of policy and legislation. Here’s a complete timeline of what led to the creation of student loans, as well as how they’ve evolved over the years and what you can expect from them in the future.

Student Loans: A Complete Timeline

The process of getting a student loan has changed over the decades, as have some of the associated risks and rewards. Here’s what you need to know.

1944: GI Bill

In the summer of 1944, President Franklin D. Roosevelt signed the Military Readjustment Act with the aim of helping World War II veterans reintegrate into society. This law, commonly referred to as the GI Bill, made it easier for veterans and military personnel to attend college or vocational school by dramatically reducing their tuition fees, among other things. To date, service members can receive financial assistance through the GI Bill.

1958: National Defense Education Act

World War II sparked fierce competition between the United States and Russia, especially when the latter launched the world’s first space satellite, Sputnik, in 1957. Naturally, this raised concerns among Americans about the delay technological.

In an effort to make higher education more affordable and improve the system to meet the nation’s technological and defense needs, President Eisenhower signed the National Defense Education Act in 1958. Among its provisions, this law offered grants, scholarships, and student loans to those majoring in engineering, mathematics, education, science, and foreign languages.

1965: Law on higher education

During his presidency, Lyndon Johnson urged Congress to enact legislation making post-secondary education more accessible to low- and middle-income families, stressing that education was “no longer a luxury, but a necessity”.

Congress listened, and in November 1965, the Higher Education Act become official. This act dramatically increased federal funds for colleges and universities and created numerous scholarships and grants for students with “considerable” financial need.

The Higher Education Act also gave birth to the Guaranteed Student Loan Program, also known as the Federal Family Education Loan Program or FFELP.

1972: The Basic Educational Opportunity Grant

Established in 1972, the Basic Educational Opportunity Grant was designed to reduce the cost of college education for low-income students pursuing their first undergraduate degree. Today, that grant is known as the Pell Grant, having been renamed in 1980 after Democratic U.S. Senator Clairborne Pell of Rhode Island, who was the driving force behind its approval.

The Pell Scholarship is considered a foundational part of student financial aid, with a maximum award of $6,895 for the 2022-23 academic year.

1992: Changes in higher education

A revision of the Higher Education Act in 1992 resulted in a significant expansion of the federal student loan program. Until now, all federal loans were subsidized, meaning the government absorbed interest while students were in school.

With the 1992 Higher Education Amendmentsthe federal government has begun offering unsubsidized loans to all students – regardless of financial need – provided they are enrolled at least half-time at an eligible institution.

These changes also created the Free Application for Federal Student Aid, or FAFSA, and an income-contingent repayment pilot program.

2001: Economic Growth and Fiscal Reconciliation Act

During his presidential campaign in 2000, President George W. Bush promised a series of tax cuts to stimulate the US economy and end the recession. This materialized in June 2001 when he signed the Economic Growth and Fiscal Reconciliation Act.

Among other things, this law eliminated the period during which borrowers could deduct student loan interest from their taxes. The limit on the amount of interest that can be deducted was also raised to $2,500, where it still stands today.

2005: Higher education reconciliation law

During his second term, President George W. Bush signed another law to help student borrowers. With the Higher Education Reconciliation Act, graduate students became eligible for PLUS loans. These loans have higher interest rates than other federal loans for higher education, but they allow students to borrow up to the full cost of attendance.

2007: Cost Reduction and College Access Act

Also signed by President George W. Bush, the College Access and Cost Reduction Act of 2007 led to several important milestones.

The act pledged to cut interest rates over a five-year period and increased funding for the Pell Grant program by $11.4 billion. Also, the income-based repayment program and the Public Service Loan Forgiveness Program (PSLF) were created to make student loan repayment more manageable.

2010: the FFELP is eliminated

In 2010, President Obama signed the Health Care and Education Reconciliation Actwhich eliminated the federal Family Education Loans program by requiring all federal student loans to be direct loans, offered by the government’s federal William D. Ford Direct Loans program.

2015: Pay as you earn

The Department of Education made changes in 2015 to the Pay As You Earn repayment plan to include all borrowers, not just those who took out loans on or after October 1, 2007.

These changes led to the creation of the revised Pay As You Earn repayment plan, which caps your monthly payments at 10% of your Discretionary Income.

2020–present: COVID-19 and student loan forbearance

In 2020, the world was hit by the COVID-19 pandemic, which led to mass layoffs and a recession. In response, President Trump signed the CARES Act on March 27, 2020. Among other provisions, this law provided temporary relief to borrowers by placing all federal student loans on administrative forbearance, without interest.

Although payments were to resume the same year, borrowers were granted six more extensions, the last approved by President Joe Biden in April and set to expire on August 31, 2022.

The Biden administration has also made substantial changes over the past year to federal programs to bring more borrowers closer to forgiveness. These include expanding borrower defense, waiving taxes on any canceled balances through 2025, automatically waiving interest on federal student loans for service members, and automatically canceling debt for disabled borrowers.

The US student debt crisis in numbers

The chart below shows how the nation’s student loan balance has grown over the past decade, from $1.05 trillion in 2012 to nearly $1.75 trillion today.

The future of student loans

During his presidential campaign, Biden promised to forgive up to $10,000 in federal student loans for each borrower. Senator Elizabeth Warren, Senate Majority Leader Chuck Schumer and Congresswoman Ayanna Pressley also advocated for the cancellation of student loans in recent years, insisting that Biden can and should forgive at least $50,000 in federal student debt per borrower. In addition, the administration has been working to update some of its repayment plans based on income to fix system errors and possibly introduce new plans.

But these proposals, and others, are still pending.

“If the administration tries to waive loan obligations, there will be a legal challenge to the authority of the administration to do so and there appears to be broad opposition in Congress to such activity,” Scott MacDonald said. , founder of the MacDonald Community Scholarship Program and author of “Debt-Free Education: Giving Back and Paying It Forward.”

Stuart Siegel, financial aid specialist and founder of FAFSAssist, agrees with MacDonald. “The fact is, until the Biden administration makes its position public, anything is possible,” he says. “But I think there will be legal challenges that could delay startup repayment.”

In the meantime, Siegel encourages borrowers to explore these options to make their payments more manageable:

  • Apply for an income-based repayment plan. If you have federal student loans and cannot afford your standard student loan payment, applying for an income-based repayment plan can significantly reduce the amount you pay each month.
  • See if you qualify for forgiveness. With all the changes going on with the PSLF program, you may be eligible for Federal Student Loan Forgiveness, or at least come close to it if you worked in a nonprofit organization, government agency, or another eligible employer.
  • Consider refinance your private loans. Private student loans don’t offer the same protections as federal student loans, and it might be a good idea to refinance them before interest rates go up, especially if you currently have a variable rate.

The bottom line

Student loans have come a long way since their inception in the 1950s. Although some changes are being made to make the system more efficient, there is still a lot of work to be done. Until then, the best thing to do is to explore your options in order to choose the one that best suits your financial situation and needs.