A Look Into the History of Student Loans

Student loans provide essential financial support for those pursuing higher education, helping to cover expenses such as tuition, books, and living costs. Widely used across the U.S., they’re a fundamental resource for many students grappling with the rising costs associated with higher education.

Though student loans make higher education accessible for a large portion of the population, they can also burden graduates financially, influencing everything from career choices to when to buy a home. Therefore, it is essential to understand their short-term and long-term implications fully.

When did student loans start? 

While it’s difficult to trace the exact history and beginning of student loans and financial aid, student loans were known to be available at the University of Bologna in Europe in the 1100s. Early private student loans in the United States began at Harvard University in the 1830s. 

The government of the United States began offering federal student loans in the late 1950s through the National Defense Education Act. However, a precursor to federal student loans began with the introduction of the Servicemen’s Readjustment Act of 1944, better known as the GI Bill. 

Federal and private student loans today differ in two crucial aspects that affect accessibility, repayment terms, and the overall cost to borrowers:

• The source of funding is different. Federal student loans are funded by the U.S. government, which often allows them to have more stable and generally lower interest rates than private student loans, which banks, credit unions, and other private lenders offer.
• The terms of repayment and borrower protections significantly vary. Federal loans feature a variety of repayment plans that are typically more flexible and can be adjusted based on the borrower’s income and life circumstances, such as income-driven repayment plans.

Notably, certain federal loans can result in loan forgiveness after a set number of years, depending on the borrower’s repayment plan and career choices. Private loans, on the other hand, do not usually offer these income-based repayment options and forgiveness programs. 

Additionally, private student loans may have less favorable forbearance and deferment options, which could impact a borrower’s financial stability during economic hardship.

When did federal student loans start?

Federal student loans were officially established by the National Defense Education Act of 1958 (NDEA), signed into law by President Dwight D. Eisenhower. However, their conceptual roots extend back to the Servicemen’s Readjustment Act (SEA) of 1944, commonly known as the GI Bill.

The GI Bill, which President Franklin D. Roosevelt signed into law, provided World War II veterans with benefits such as low-interest housing loans, laying a foundational concept for future educational loans.

The NDEA evolved into the Perkins Loan Program, which later facilitated the establishment of more comprehensive federal student loan programs under Title IV of the Higher Education Act of 1965, an Act signed into law by President Lyndon Johnson. 

Title IV significantly expanded federal funding for higher education, establishing a system of grants and student loans that continues to evolve and support students today.

When did private student loans start?

Though it’s difficult—if not impossible—to trace the exact beginning of private student loans, research suggests they existed in Europe in the Middle Ages. In 1838, Harvard University pioneered student loans by creating a needs-based program called the Harvard Loan Program. 

Throughout the rest of the mid-to-late 1800s, other colleges in the United States began offering similar programs to Harvard University’s. These loan programs were designed to help students finance their education without relying solely on philanthropic funding. 

Today, research suggests less than 8% of all outstanding student loan debt consists of private loans; the vast majority of student loans today are issued and guaranteed by the federal government. 

It makes sense that most people choose federal student loans rather than private ones, as the rates, terms, and benefits are typically much better. For instance, federal student loans offer relatively low rates, loan forgiveness programs, and income-driven repayment plans, among other benefits.

Why did the government create a student loan program?

The primary motivation behind establishing federal student loans through the National Defense Education Act of 1958 (NDEA) was to enhance national defense capabilities and economic competitiveness by broadening access to higher education. 

By making college education more financially accessible, the government aimed to cultivate a workforce with advanced skills in critical areas. Some of the specific goals of the NDEA included:

• Making education more accessible: The NDEA aimed to provide a dependable source of funding for full-time undergraduate and graduate students, particularly those who demonstrated financial need, thereby making higher education more feasible for a broader population segment.
• Prioritizing workforce shortages: The Act specifically targeted filling gaps in critical fields. To address labor shortages, the government prioritized offering student loans to those pursuing careers as teachers or in fields such as science, engineering, math, and contemporary foreign languages.

These strategic goals were designed not just to meet immediate educational needs but also to strengthen the nation’s overall economic and defense position by ensuring a continuous supply of highly skilled professionals. 

The focus on education as a pillar of national strength marked the beginning of a long-term commitment to federal funding for student aid, further expanded under Title IV of the Higher Education Act of 1965. 

This legislation and federal student loan program goals continue to evolve, supporting the changing needs of students and the nation’s workforce.

Other federal student loan programs exist globally, reflecting a larger strategy to support higher education. For instance, Canada’s student loans and grants help make higher education accessible. In the UK, students may receive funding from government-operated Student Loans Company.

When did student loan interest start? 

When Harvard University created the private Harvard Loan Program in 1838, one of the key features was that it offered zero-interest loans to students who could not afford the costs of attendance. 

Federal student loans offered through the National Defense Education Act of 1958 initially included a 3% interest rate and a 10-year repayment term. Eventually, the federal government covered loan interest costs for the Stafford Loan while students attended school. 

Interest rates from the 1960s to the early 1990s ranged from 6% to 10%. Ultimately, the rates for federal student loans are established by legislation. While variable rates were used for a while, beginning in the 1990s, every federal student loan today has a fixed interest rate that won’t ever change.  

With all loans, a goal of interest is to cover the cost of administering the loan and potential losses. Currently, the interest rates on federal student loans are often lower than what you would pay for private student loans. Federal rates are also lower than many other loan types.

To put this in perspective, the following table compares the most recent average rates for various types of consumer loans:

Loan type	Average interest rate
Federal student loans for undergraduates	5.50%
Federal student loans for graduates	7.05%
Home mortgage (30-year, fixed rate)	6.88%
New car loan (60-month term)	8.22%
Personal loan (24-month term)	12.49%
Interest-bearing credit card	22.63%

With their fixed interest rates, today’s federal student loans provide a stable and comparatively affordable financing option for higher education. 

Ask the expert

Catherine Valega

CFP®

When considering student loans, it’s critical to understand the impact of your loan repayments on your life after graduation. You wouldn’t want your high debt load to relegate you to your parent’s basement—that is a terrible choice for you and the economy. One rule of thumb is not to borrow more than your anticipated first-year salary post graduation. If you’re studying social sciences and plan to work as a social worker earning $40,000/year—that $40,000 represents the maximum amount of debt you should take for your entire undergraduate education. If you’re studying engineering and anticipate a first-year salary of $80,000, you could withstand a higher maximum debt load.

How have student loans changed?

The evolution of student loans has been significantly shaped by legislative reforms and shifts in administrative policies over time. Some of the key developments include:

• The National Defense Education Act of 1958 marked the beginning of federal involvement in student loans, addressing national education and workforce development needs and setting the stage for future expansions and reforms.
• The Higher Education Act of 1965 established a more structured federal student loan system, which has been reauthorized and amended repeatedly to respond to changing educational and economic conditions.
• The Health Care and Education Reconciliation Act of 2010 discontinued the Federal Family Education Loan (FFEL) program and consolidated most federal student lending into the Direct Loan Program to streamline funding and reduce costs​​.

Subsequent amendments to the Higher Education Act of 1965 have introduced measures to tackle the growing concern over student debt. 

Notably, revisions to income-driven repayment plans now adjust monthly loan payments based on the student’s income and family size, offering a financial safety net for those with lower earnings.

The ongoing evolution of student loans reflects continued legislative efforts to enhance higher education accessibility while addressing the financial challenges graduates face. 

As the debate over student loan impact on tuition inflation and the broader economic implications for borrowers persists, these legislative frameworks remain critical in shaping the future of higher education financing in the United States.

Current state of student loans 

The current state of student loans in the United States is a topic of intense debate and ongoing legislative attention. Recent developments have focused significantly on the issue of student loan forgiveness and other debt relief measures.

Some examples of recent developments include the following: 

• Student loan forgiveness: The Biden administration has proposed several plans to reduce the burden of student debt. One of these plans included providing up to $20,000 in debt relief to some borrowers.
• Temporary debt relief during the pandemic: The pause of student loan payments, which began in March 2020 as a response to the economic impact of the COVID-19 pandemic, was extended multiple times. This relief ended in September 2023.

Looking ahead, there is still the potential for significant changes to the student loan system. Discussions in Congress and among advocacy groups suggest there may be reforms to repayment plans. 

For instance, broad discussions include making repayment plans more income-responsive and enacting more comprehensive forgiveness programs that could adjust or erase debts based on specific eligibility criteria, such as income levels, public service, or the repayment period length.

These ongoing debates and potential legislative actions indicate a continually evolving future for student loan policies.