This is the first in a series of articles about student loans. Since the financial crisis of 2008-09, there has been much debate about the student loan situation in the United States. In just the last decade, the cost of student loans has increased to nearly one and a half trillion dollars. In other words, this one form of debt alone comprises nearly eight percent of the GDP. Naturally, many are concerned.
How did student debt become such a major issue in America? To understand, a fast history of student loans is in order.
A Fast History of Student Loans
The history begins in 1040 when private lenders provided loans to students attending Harvard University. A prestigious school even then, costs were such that the loans would help the students with the cost of living while in attendance.
Twenty-seven years later, the United States Department of Education was created. The new bureaucracy had a mission of helping schools raise standards and increase enrollments. But, no formal student loan program was implemented.
In fact, the first formal program by the United States did not occur until after World War II. There were soldiers returning home from the war in large numbers. With all of those GIs returning to the workforce, it was a challenge. Much of the United States’ industrial output was consumed in war production, which was no longer as necessary as before. Recognizing the strain to the economy such a large home migration would cause, Congress passed the G.I. Bill to provide funds for military members to go to school.
Many economists have attributed the enormous economic increases in the following decade and a half to the G.I. Bill. The strain to the economy was mitigated and upon graduation, the U.S. economy had a well-educated workforce.
At the same time, the Cold War was on. To better compete globally, the National Defense Education Act was passed in 1958. It provided scholarships, grants, and loans for students who excelled in math, science, and languages. These were the first Federal student loans.
Not long after, the Civil Rights movement and President Lyndon Johnson’s Great Society produced the Higher Education Act to provide funds for needy students. The Federal Family Education Loan Program (FFELP) would become the first guaranteed student loan program in the nation. Banks and private lenders could provide the funds needed and the U.S. government would back them with subsidies and guarantees. By 1972, the Pell Grant was created.
It would be another twenty years before major changes occurred. In 1992, FAFSA was created to provide a simpler means of providing educational funds. The unsubsidized direct student loans have become the standard and ultimately, lead to the current situation.
A Fast History of the Current Student Loan Crisis
A year after establishing FAFSA (Free Application for Federal Student Aid), the Student Loan Reform Act provided students with direct access to funds. Instead of the loans going direct to the educational institution, students could request extra funds to cover living expenses up to a specified limit. In times of economic crisis more people enroll in school. The financial crisis of 2008 and 2009 nearly guaranteed massive increases in federal student loan guarantees.
One final element ensured that student spending and loans would rapidly increase: Online universities. Along with easy access to funds came easy access to classes. Little wonder that many American’s, desperate to better their standard of living, enrolled in the easy programs. Most of these online programs also offer training at hyper-inflated rates, further increasing the cost of education. Some of these online programs are just plain junk and impress no employer (more on that later).
Given the ease of lending combined with the ease of attendance, anything other than higher student debt would be surprising. But, the easier lending becomes, the less people tend to know about the terms and conditions. With many student loan debts coming due, many are now seeking to understand just what they got themselves into.
In this series of articles, Student Loans A-Z, we are going to cover most of the basics. We encourage you to bookmark our blog are return often or sign up for updates to receive each post as they are published.