The History of College Student Loans

Every other week, it seems, we hear dire warnings about how much debt our college students are burdened with when they graduate.

Indeed, more than ½ of college students take out student loans, and the average student loan tab for a graduating senior is just over $25,000.  Coupled with a rough economy and a general lack of financial knowledge, recent college graduates are struggling financially like never before.

Yet, it hasn’t always been this way.

Many of us just grew up knowing that student loans have, and will be, available, but that hasn’t always been the case.

A Brief History of College Student Loans

While loans for college have been available for decades—Harvard University was the first to set up loans in 1840 (Forbes)—they didn’t become mainstream until the 1960s.

The student loan has undergone many changes, often when a new president takes office.

For instance, in 1986, President Reagan eliminated student loan interest as a tax deduction.  For 10 years, student loans were not deductible until President Clinton once again allowed the interest to be deductible in 1997 (Forbes).  However, Clinton only allowed the student loan interest to be deductible for the first five years the loan was in repayment; in 2001, the law was changed to allow the interest to be deductible for the life of the loan.

That law is set to expire at the end of 2012.

In 2007, President Bush reduced the student loan interest rate from 6.8% to 3.4%.  That temporary reduction is also set to expire July of 2013 as it was just extended.

While student loans used to offer students a bridge to cover the amount of their tuition that their own and their parents’ savings did not cover in conjunction with grants available, that is no longer the case. 

College tuition is outpacing inflation every year.  According to The New York Times, in a study conducted by The National Center for Public Policy and Higher Education, “published college tuition and fees increased 439 percent from 1982 to 2007 while median family income rose 147 percent.  Student borrowing has more than doubled in the last decade, and students from lower-income families, on average, get smaller grants from the colleges they attend than students from more affluent families” (The New York Times).

Grant-Based Aid Is Not as Plentiful as It Used to Be

Meanwhile grant-based aid has not kept up with inflation.

Pell Grants, which are based on aid, were first offered in 1973.  Then, a needy student could get a Pell Grant that would nearly cover the cost of their education for a year.  However, in 2011, the maximum Pell Grant award is just $5,500, while “in-state tuition and fees at public four-year institutions average $8,244 in 2011-12, $631 (8.3 percent) higher than in 2010-11.  Average total charges, including tuition and fees and room and board, are $17,131, up 6.0 percent” (ABC News).

A Pell Grant now covers less than 1/3 the cost of college for the neediest students.  The difference is often made up in student loans, which is part of the reason why, in 2011, there was “one trillion in outstanding student loans” (Huffington Post).  While the average student  graduates with a little more than $25,000 in student loan debt, the top 1 percent of student loan borrowers have $150,000 in student loan debt (Huffington Post).

Finally

While student loans were originally meant to make college more affordable and bridge a gap in funding for students, over the years, that bridge has become larger and larger, and students are increasingly saddled with more and more debt.

To make matters worse, grant-based aid now only covers less than one third the cost of education.

While there are other strategies available to cut the cost of a college education such as attending a community college first and working at a university to cut the cost of tuition, many students can only afford college if they take on a heavy load of debt, which was not even an option for students 50 years ago, before college loans became mainstream.