A Look at Student Loans Through History

The United States Federal Reserve reports 44.2 million Americans bear the burden of student loan debt.

Co-researchers Robert Cloud, education professor at Baylor University, and Richard Fossey,  education professor at University of Louisiana – Lafayette, estimate that 20 million of those Americans will never be able to pay back their loans.

Fossey said eight million people have formally defaulted, meaning they’ve failed to make payments on their loans for over nine months. Two or three million are delinquent, having missed payments but not enough to default. Over six million are on income-based repayment plans that won’t actually pay back the loan.

 

“The vast majority of the people who are on those plans are making payments so low that the interest in accruing,” Fossey said. “In other words, their debt gets largest every month … and at the end of the 25 years, their debt is forgiven, but they haven’t paid any of it off.”

Speculation behind student loan popularity — and thus student debt — goes back a few decades. In 1958, Congress enacted the National Defense Education Act in response to increasing tensions with the Soviet Union, providing funding for national education and offering loans to college students.

A subset of the act, the National Defense Student Loan Program, later called the Perkins Loan Program, was the first of its kind. In 1965, Congress enacted the Guaranteed Student Loan Program, later renamed as the Stafford Loan Program, under the Higher Education Act.

While these programs provided help for the poorest students, they did little to help the middle-class students who could not demonstrate extraordinary financial need. In response to pressure from middle-class families, Congress softened the requirements and essentially made every citizen eligible for federal student loans.

“Now, it’s probably too easy to get a student loan in some situations,” Cloud said. “So you have 18-, 19-, 20-year-old students who are a little bit naive borrow more money than they can pay back or more money than they need, and then that exacerbates the problem with the loan burden.”

Cloud said the issue of student loan debt falls on every American, even those without loans.

“I think the federal student loan program is one of the best things that Americans have ever done for each other in the history of our country,” Cloud said. “It’s a wonderful effort on the part of the American people to reach out and help each other do better.”

The problem, he said, is making sure the program stays solvent. At this rate, he said it doesn’t look good, with colleges rapidly increasing tuition costs and using students’ reliance on loans as a fallback.

The Bureau of Labor Statistics reports the rate of college tuition inflation was 5.46 percent each year between 1979 and 2017 — over two percent more than the average rate of inflation, which rests at 3.22 percent.

Paying back student loans hasn’t always been a 25-year or lifelong ordeal. Up until the 1980s, individuals could discharge their student loans and file for bankruptcy after five years. In 1990, the timeframe extended to seven years.

In 1998, these rules changed.

“Congress was on the defensive about the increasing default rates,” Cloud said. “It was almost impossible to default, and you had to prove what we call undue hardship.”

The debtor must show that he cannot maintain a normal standard of living and pay off the debt, show that his situation will not change over the life of the loans, and prove that he tried to act upon the loans in good faith.

“Congress put these restrictions on bankruptcy relief on the belief that student debtors were gaming the system, that they were going to college, getting an education that would advance their careers and their income, and then just going into bankruptcy court right after graduating and discharging the debt,” Fossey said. “There’s no evidence to show that the courts were being abused. That just wasn’t right.”

Fossey said trying to default on student loans makes going to bankruptcy court a nightmare, especially when going against Education Credit Management Corporation, a non-profit loan monitor that has faced criticism for its tactics, or other borrowing agencies.

“These people are broke who go into bankruptcy court, without an attorney, and ECMC and others are well-funded, so they have plenty of money for attorneys, and their attorney fees are reimbursed by the government so they will litigate for years,” Fossey said.

Fossey and Cloud both agree that laws must change on the federal level to ease student loan debt, but until then, students and colleges should take proactive measures to decrease it.

“I’ve served at five postsecondary institutions the past few years, and none of us did a good job of advising our student borrowers to be careful,” Cloud said. “Students shouldn’t borrow any more than they absolutely need to go to college. You see, and if we can start improving there that will help a lot.”

On the state level, the Ohio Department of Higher Education’s GEAR UP program motivates low-income high school students to apply to college and provides additional financial help.

Director Carlos Bing said that scholarships range from $200-$1000 a semester, and while they don’t cover the full cost of tuition, he said they can help.

“We would like to do more actively, if there were more dollars available, pay the full-ride,” he said. “But we do believe that providing that additional funding is a great way to incentivise students to go to school.”

To lessen debt, Bing recommends attending a 2-year school and then transferring to a larger institution, maximizing the scholarships and financial aid available, and considering a lower-cost college even if it isn’t a student’s first choice.