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Not Just for the Elite

A History of College Student Loans in America

Paying for college is an issue faced by parents today virtually from the moment of their child’s birth. And where parents can only partially help or not help at all, many students entering college face complex decisions about how to pay for their education, from applying for scholarships and grants to low-interest student loans from the federal government. Total financial packages put together by institutions can be difficult to understand, let alone manage. In recent generations, demand for (what would come to be called) postsecondary education of all forms continues to increase in large part because of money being made available by the government to offset some or all of the financial burden of college. Access to college has come a long way especially within the last century because of several key events that caused a major shift in attitude about higher education, though issues of access and affordability continue to arise.

Early Access to Education and the Separation of Church and State

In the earliest years of the fledgling settlements in North America, what little formal higher education that existed was largely directed toward the religious study of wealthy, white, Protestant men. This would remain true for the better part of the next two centuries. In all early colleges in colonial America, education was largely church supported. Only when state-supported land grant colleges were developed on vast areas of public lands would options for postsecondary education begin to expand beyond church and otherwise privately supported institutions. However, support for students wanting to access these institutions remained largely nonexistent. One early exception was a £100 contribution by Lady Anne (Radcliffe) Mowlson in 1643 designated as an endowment fund for needy men wanting to attend Harvard. The women’s annex of Harvard, Radcliffe College, would later be named in her honor. But despite such early scholarship provisions, financial aid and access to college was still minimal—though the church did continue to provide support for students entering the ministry (Archibald 2002).

The reason the federal government had traditionally steered clear of financial aid has to do with events surrounding the Constitutional Convention of 1787 and subsequent interpretation of the Constitution. Early delegates to the convention, including James Madison, championed a national university free of religious distinction, but the motion failed since the Constitution does not address higher education. Even President George Washington’s recommendation for such an institution was ignored because Congress firmly believed the question was best left up to the states. Thomas Jefferson believed widespread access to education based on “merit and ability” was instrumental to the democracy and even introduced the Bill for the More General Diffusion of Knowledge to help increase American’s intellectual mobility, but it too did not pass (Price 2004).

Throughout the nineteenth century as the United States expanded, so too did the number of institutions. With so much expansion, nascent colleges and universities had major budgetary concerns to address just to stay afloat, so the question of student loans continued to not be addressed. But with the Morrill-Wade Land Grant College Act, passed with President Lincoln’s signature in 1862 with the objective of establishing agricultural schools on the land that was endowed to the states, it became evident that these public institutions needed to be funded as well as be widely accessible. Meanwhile, attitudes were changing about higher education, demand for educational facilities began to catch up with the supply, and the image of colleges as havens for the elite of society was slowly transforming (Archibald 2002).

Pragmatic philosopher John Dewey was an early twentieth-century champion of educational reform who helped transform the landscape of American education. Dewey helped to achieve Jefferson’s vision by arguing that higher education promotes social progress of the individual as well as the greater good of the economic society (Price 2004). Even before Dewey published his work, the first college enrollment boom during the economic prosperity of the decade following World War I seemed already to believe in this philosophy. But those numbers pale in comparison to the number of people entering college following World War II when The Servicemen’s Readjustment Act of 1944, or the GI Bill, provided a grant to cover the expenses of college that, when packaged with two years of service in the armed forces, meant a full three years’ worth of financial provisions (which was often sufficient to earn a degree). Thus, the era of mass education had begun as nearly 4.4 million veterans returning home set off for college, many of whom would not have been candidates prior to their service. The GI Bill was not considered financial aid for college so much as it was viewed as “deferred compensation” for their service. But the idea of providing federal aid for postsecondary education became a politically motivated issue as members of Congress had to answer to a changing constituency (Archibald 2002).

College Scholarship Services and the Higher Education Act of 1965

In some instances, colleges and universities took initiative to evaluate and compare their systems of financial aid to establish some uniformity of practice to better understand how to deal with the needs of their students. The College Scholarship Service of 1954 was a board of private institutions designed to remove the individual student’s financial considerations when selecting where to attend in favor of providing aid commensurate with need. Moreover, financial aid would be provided based on academic prowess, a predecessor to today’s politically popular, state-sponsored merit-based scholarships. Less talented but deserving students could still qualify for money and admission to less selective schools. At state-supported schools, a kind of hierarchy developed that separated institutions into the elite universities, state colleges, and junior colleges. The College Scholarship Service established models of high and low tuition to aid ratios that were ideal in theory but were largely never accomplished. Many institutions were simply ill equipped to handle the needs of all their students.

The federal government officially entered the student loan arena in 1958. Not only was the demand for access to college increasing, but a report from 1947 called the President’s Commission on Higher Education had revived the debate in Congress in time for the National Defense Education Act of 1958, which was a program of low-interest student loans (to become the Perkins Loan) provided in response to concerns that the United States was falling behind in fields of science and engineering. The scare was caused by the Soviet launch of Sputnik which, combined with the war on poverty, provided for the government a kind of back entrance into the arena of federal student aid (Archibald 2002).

Of the eight titles of the Higher Education Act of 1965, only Title IV addressed assistance to students, and initially it took a back seat to institutional aid. Title IV established Educational Opportunity Grants based on institutions aggressively pursuing students with “exceptional financial need” (Gladieux and Hauptman 1995). The Guaranteed Student Loan Program (to become the Stafford Loan) was designed to appeal more to middle-income students by providing loan subsidies; the government paid interest accrued during the student’s collegiate career and paid the difference between a set low interest rate and the market rate after graduation. It was, however, in 1972 with the reauthorization of the Higher Education Act that Congress rounded out the program to form what is the “basic charter of today’s federal student aid system” (Gladieux and Hauptman 1995). Out of the heated debates about the program there emerged new language, new types of assistance, expanded opportunity grants, and more incentives for the states. The term “postsecondary education” replaced “higher education” in order to expand aid to students entering junior colleges as well as trade schools and career colleges. During a congressional session in 1980, the Pell Grant (named after Senator Claiborne Pell) emerged from the Basic Economic Opportunity Grants; it was larger than its predecessors and designed to encourage students from low-income situations to attend college. Eligibility for Pell Grants is based on a family’s total income and assets. Finally, the State Student Incentive Grant Program, which also originated with the 1972 Higher Education Act, offered matching funds to states to encourage their need-based aid programs, and within three years all fifty states actively participated in this program (Archibald 2002).

Re-evaluations, Tax Credits, and New Perspectives on Student Loans

After 1972, new initiatives such as the Middle-Income Assistance Act of 1978, which widened Pell Grant eligibility, further catered to the middle class. Already a gap was becoming apparent between the availability of federal aid and access to institutions as tuition began to rise steadily. President Reagan cut spending significantly during the 1980s though demand for loans continued to rise, though less rapidly than before. The leveling off of student aid spending was partially responsible for the shift toward loan spending and away from grant spending that has continued to the present day. Colleges formed new boards such as the 568 Presidents’ Working Group to further discuss financial aid policy as well as assess the financial need of their student body in order to adopt a set of standardized rules. This group built upon the work of the College Scholarship Service as well as the now-defunct Overlap Group of 1958, which had met to smooth the field of financial aid so separate institutions would make the same offer to individual students. But antitrust action eroded the Overlap Group to encourage competition, much to the dismay of college administrators.

The next widening of the gap between loan and grant spending occurred in 1993 with programs that increased borrowing limits and brought about unsubsidized loans for middle-income students. Essentially, more students were made eligible for aid and, as more students entered into postsecondary education of all kinds, tuition naturally increased, Unfortunately, this happened at a rate higher than the rate of inflation, outpacing the average family income throughout the 1990s (Glaudieux and Hauptman). But in 1997, tax credits for college expenses became law, and this was the first instance of non-need-based federal financial aid. President Clinton had aggressively pursued a complete overhaul of the federal financial aid system early in his first term, but the process was overwhelming and new phases of the program intended to pursue long-range reform were lost to downsizing when the Republican party took control of Congress during the midterm election of 1994. The 1998 reauthorization of the Higher Education Act organized federal programs for student aid through the U.S. Department of Education.

In its present state, the system of federal financial aid is “an amalgam of state programs, federal programs and tax credits, practices of private institutions, and programs of some private foundations and charities” (Archibald 2002). The consequence of this ramshackle architecture is “a bewildering maze of programs and options” that is chronically under-performing and in a constant state of deterioration (ibid 2002). For most observers, this situation screams for reform, but where precisely to begin is a difficult question to address. Among the many models and formulas, the frontrunner in the reform debate is a more integrated approach to financial aid. This approach begins with making higher education more affordable by closing the gap between loan and grant spending. Presently, students overwhelmingly rely upon loans, and the combined loan cap increase and demand for college admission has helped drive tuition up far beyond the Pell Grant maximum.

A more integrated approach to federal and state grants exists in the form of the Leveraging Educational Assistance Program from the Higher Education Act. The federal government matches 50 cents to every dollar spent at the state level, which early in the twenty-first century has amounted to a combined $150 million a year, but is only a fraction of the total spent for aid. Meanwhile, programs such as the Guaranteed Student Loans and Tax Credits remain immensely popular with the middle class, which makes them politically valuable (Price 2004).

Today the focus on affordability continues to center on the middle class, subordinating the discussion on access (Archibald 2002). One result of the affordability crisis is that students from low-income families and, in particular, minority students commonly attend less-expensive and lower-tier colleges. And while debts accrued by students in this situation are not necessarily higher, the subsequent ability to pay the debt off is usually much more difficult for students graduating from trade schools or lower-tier colleges since the average starting income is typically much smaller than students graduating from upper-tier colleges (Price 2004). In other words, even as the federal government spends some $86 billion a year in financial aid, solutions remain elusive for successfully overhauling such a complex financial system.

-- Posted March 15, 2008


Archibald. Robert B. 2002. Redesigning the Financial Aid System: Why Colleges and Universities Should Switch Roles with the Federal Government. Baltimore, MD: The Johns Hopkins University Press.

Gladieux, Lawrence E. and Arthur M. Hauptman. 1995. The College Aid Quandary: Access, Quality, and the Federal Role. Washington, D.C.: The Brookings Institutions.

Price, Derek V. 2004. Borrowing Inequality: Race, Class, and Student Loans. Boulder, CO: Lynne Rienner Publishers.