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Student Loans

A Look Into the History of Student Loans

Updated May 02, 2023   |   5-min read

Check out our video on the history of student loans, or, if you prefer to read through the timeline, continue below.

Just about everyone has heard about student loans. They are constantly mentioned in the news—often with much scrutiny and, more often than not, in a negative light.

While it would be nice to attend college for free or without having to take on debt, the truth is that student loans are often necessary for those looking to obtain a higher education—especially considering the rate at which the average college tuition continues to increase.

Though many people know about student loans, not many know how they started and how we’ve gotten to where we are today—with over $1.7 trillion in student loan debt in the United States.

The timeline below will cover the major events and bills that paved the way to create the present-day student loan industry.

A timeline of the history of student loans

1840: The first student loans are offered to students attending Harvard University in 1840.

1867: The United States Department of Education is formed to help make schools more successful, but it does not yet have a student loan program.

1944: The GI Bill passes, helping World War II veterans get money to go to college for free or for very cheap. In subsequent years, veterans would account for nearly half of those attending college.

1958: Federal student loans are first offered under the National Defense Education Act to help the United States compete with other countries—namely the Soviet Union. High school students who showed promise in mathematics, science, engineering, or foreign language, or those who wanted to become teachers, were offered grants, scholarships, and student loans.

1965: The Higher Education Act is established to provide “Educational Opportunity Grants” to colleges recruiting students with considerable financial need. The Higher Education Act also establishes the Guaranteed Student Loan Program, also known as the Federal Family Education Loan Program or FFELP, which allows banks and private institutions to provide government-subsidized and guaranteed loans to students.

1966: The National Association of Financial Aid Administrators is created to monitor financial aid throughout the nation.

1972: The Basic Educational Opportunity Grant, which would come to be called the Pell Grant, is created to help in-need students attend college. Senator Claiborne Pell was instrumental in its creation.

1992: The Higher Education Amendments of 1992 create the FAFSA, the Direct Lending program, and unsubsidized Stafford loans, which meant that now students had to cover interest costs while in school rather than the federal government. Up until this point, the federal government was subsidizing student loans. We are beginning to see the modern-day student loan system.

1993: The Student Loan Reform Act officially implements the Direct Lending program. Under this program, the government can now directly lend to student loan borrowers, instead of through a private institution, which had been the only system since 1965 (FFELP).

2005: The Higher Education Reconciliation Act reduces loan fees from 4% to 1% and allows graduate students to take out PLUS Loans. Outstanding student loan debt is now at $391 billion.

2008: Credit market problems stemming from the Great Recession forces many private lenders to back out of FFELP as they no longer have the financial ability to provide loans to college students. Outstanding student loan debt is now at $639 billion.

2010: Legislation proposed under the Obama administration eliminates FFELP and now requires all new federal student loans to be Direct Loans as part of the Direct Lending Program, which was launched back in 1993. At this time, private lenders begin offering private student loans to students independently from the government. Outstanding student loan debt is now at $811 billion.

2012: Total amount of student loan debt passes $1 trillion.

2021: Outstanding student loan debt now sits at $1.7 trillion. In March 2020, the coronavirus pandemic pushes the federal government to put all federal student loans in pandemic forbearance, which means no payments are required and interest won’t accrue. In January 2021, the newly formed Biden Administration extends pandemic forbearance until October 2021.

2022: In August, the Biden Administration announced student loan relief for borrowers. This relief comes in the form of up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the Department of Education and up to $10,000 in debt cancellation to non-Pell Grant recipients. To be eligible, individuals must have an income less than $125,000 ($250,000 for married couples). The administration also announced that the pause on federal student loan repayment would be extended through the remainder of the year. In addition to this relief, a new income-driven repayment plan was proposed that would cap the monthly payments on undergraduate loans to 5% of a borrower’s discretionary income (half of the rate borrowers currently pay).

What does the future hold for student loans?

As you can see, student loans have gone through quite the evolution. While it’s difficult to project what will happen in the coming years, continued change is expected.

Political debates have focused on the topic of loan forgiveness and limitations to the amount of federal student debt that borrowers can take on. But until new legislation is passed, the future looks to hold an ever increasing debt burden for borrowers.

Remember, while the total student loan debt is something we need to fix so students aren’t overwhelmed with repayment as they start their careers, student loans continue to help millions of young adults attend college. In most cases, this education allows these students to pursue their passions and take part in career opportunities that would otherwise be unreachable.