Student Loans

A History of Student Loans

Achieving Higher-Education

In the modern age of today, many people take their education for granted. All too often and familiar is the tale of the kid who sees school as little more than a burden, needlessly taking up time that could otherwise be spent having fun. And to some extent, this mindset sticks with many people on into their adulthood. However, this perspective, in and of itself, is detrimental to both the individual and surrounding environment as well.

People should not look upon education and the institutions that distribute it with scorn and hostility, but rather a desire to embrace & improve. Many ancient scholars realized this need for a perspective change, and as such the concept of the university was born. Universities were originally intended to be places of educational freedom, in which participants could readily take part in high-tier lessons of any imaginable subject; without fear of judgement or prejudice.

As the years went by, however, and the practicalities of government began to take an effect on the education industry, universities were converted from freedom oriented, open-access hubs of knowledge into the institutes of higher education that we know them as today. Due to the breadth of knowledge available within universities, and the sheer size of the amount of people that desired access to them, governments began to see the value in requiring a tuition fee for entry into these higher educational institutions. And as such we find ourselves in the predicament that we are in today.

The Birth of Student Loans
Once it was recognized by world governments & administration boards that universities could be reliable sources of income, the tuition fees started to become commonplace amongst higher education institutions. This growing prominence of tuition requirements struck worse-off families the hardest, and many laymen found themselves without the resources necessary to take part in the process of higher education, as a result.

Many empathetic yet enterprising individuals saw this divide between supply & demand for higher education, and took matters into their own hands in an attempt to do something about it. In the year 1965, the federal government began guaranteeing citizens student loans, which were to be provided by established banks and various nonprofit organizations. The execution of this act would mark the creation of the program now called the Federal Family Education Loan, or FFEL, program.

Although this marked the first instance of government-sanctioned student loans, these loans were still entirely being issued by private institutions and organizations, as opposed to federal ones. The first issuing of federal student loans actually managed to take place a couple of years prior, in the year 1958. The National Defense Education Act, pioneered and championed by then world-renowned economist Milton Friedman, issued direct federal student loans that were capitalized with U.S. Treasury Funds.

The problem with this method initially, was that once Congress sought to expand upon it, they were quickly met with budgetary restraints and thus consequentially saw the guarantee method of approach as far more financially viable. Nowadays, however, the system of guaranteed student loans has long since exposed detrimental qualities, and as such it has been entirely replaced; all new student loans now originate directly from the Department of Education itself.

Whilst under the budget rules of 1965, a direct issued loan would have to show up as a total loss within the budget for the year it was made; even though most of it would likely be paid back in the future along with interest. In contrast to this, guaranteed loans would place the full credit & faith of the United States behind a privatized bank loan; and thus, a loan issued in such a way would appear within the budget to have no upfront cost at all.

This is due to the fact that the governments payments regarding defaults and interest subsidies would not actually occur until later years. Although seemingly viable at first, this would raise concerns from numerous economists who worried that, by doing this, the government was essentially offloading the costs of their financial commitments.

With those concerns being raised on part of the economists, in the year 1990 they would get the outcome they desired and saw as fruitful. President George H.W. Bush provided his signature on the Federal Credit Reform Act, and in doing so, all forms of governmental loan programs would have to account for their long-term income & expenses. Each loan program would, henceforth, operate according to an estimated “subsidy cost”.

A subsidy cost is the designated amount of money that the loan program needs to set aside whenever a loan is made, in order to cover the governmental costs drawn up over the life of the loan itself. The Government Accountability Office states that the old method for loan distribution “distorted costs and did not recognize the economic reality of any of the transactions”. This was in start contrast to the new approach, which they highlighted as “providing transparency regarding the total estimated subsidy costs of the government rather than recognizing these costs sporadically on a cash basis over several years as payments are made and receipts are collected”.

Not only did this change in budgetary rules allow for more effective distribution of student loans, it also reformed the way that policy discussions take place on Capitol Hill. In 1993, then president Bill Clinton made a proposition for replacing the guarantee program with a direct lending program, as part of his deficit reduction plan. All estimates gathered from any of the governments budgetary and auditing agencies had revealed that adopting the direct method of lending would lead to the same amount of loans being distributed, but for a significantly lesser cost.

In 1993, Congress passed a budget reconciliation bill; introducing direct lending methods into the fray for the first time in history.

So, we’ve gone over the history of student loans, why they came about and what their origins are. With this knowledge, we hope you can make more effective decisions regarding your higher education.