The History of Student Loans in the United States

Learn about the history of student loans and their evolution over the years since their origins during the Cold War, up to the current student loan debt crisis.

The History of Student Loans in the United States

The history of student loans in the United States dates back to the early 20th century, when higher education was largely the domain of the wealthy elite. As more people began to see the value of a college education, however, the federal government and private lenders began to offer financial aid to students in need.

In this BrokeScholar study, we trace the history of student loans in America from its origins to where it stands nowadays. Read on to find out how student loans got their start and how much they’ve evolved over the last seven decades.

Origins of Student Loans: 1950s-1960s

The Cold War between the US and its allies and the USSR and its allies provided the backdrop and impetus for some of the first moves toward the creation of student loans for college. The first major federal student loan program was established in 1958 with the passage of the National Defense Education Act. This law provided funding for STEM programs and created a low-interest loan program for undergraduate and graduate students who demonstrated financial need. The loans were made by private lenders, but the federal government guaranteed them, which made them more accessible to students who might not have been able to secure loans otherwise.

The program was successful in helping many students attend college who might not have otherwise been able to afford it. However, it also had its limitations. For one thing, the loans were only available to students who were pursuing degrees in STEM fields. Additionally, the program did not provide enough funding to meet the needs of all students who were seeking financial aid.

In 1965, Congress passed the Higher Education Act, which expanded federal support for higher education even further. This law created the Guaranteed Student Loan (GSL) program, which was later renamed the Federal Family Education Loan (FFEL) program. Under this program, private lenders provided loans to students, with the federal government guaranteeing the loans.

The FFEL program was designed to make higher education more accessible to a wider range of students. With the federal government guaranteeing the loans, private lenders were more willing to lend money to students who might not have been able to secure loans otherwise. The program also allowed students to borrow more money than they could under the earlier National Defense Education Act loan program.

Activism and Evolution of Student Loans: 1970s

By the 1970s, the FFEL program had become the primary source of federal student aid in the United States. The program, however, was not without its critics. Some people argued that the program was too complicated, with too many different types of loans and too many different eligibility requirements. Others pointed out that the program was not reaching enough low-income students, who often had the most difficulty paying for college.

In response to these concerns, Congress passed the Higher Education Amendments of 1972. These amendments expanded the FFEL program and created a new program called the Basic Educational Opportunity Grant (BEOG) program. The BEOG program provided grants to low-income students, which did not have to be repaid. The program was designed to make higher education more accessible to students from disadvantaged backgrounds.

Despite the expansion of federal student aid programs in the 1960s and 1970s, many students still struggled to pay for college. The cost of higher education was rising faster than the rate of inflation, and many students were graduating with significant debt. In 1978, Congress passed the Middle Income Student Assistance Act, which created an updated program called the Guaranteed Student Loan (GSL) program.

The GSL program was similar to the FFEL program, but it was specifically designed to help middle-income students who did not qualify for grants or other forms of financial aid. Under the GSL program, students could borrow up to $5,000 per year, with a total lifetime borrowing limit of $25,000. The interest rate on GSL loans was fixed at 7%, which was lower than the rate on many private loans.

Throughout the 1970s, student activism played a major role in shaping the debate over student loans and financial aid. Students protested against rising tuition costs and called for increased funding for higher education. In 1972, a group of students at Harvard University occupied the university's financial aid office to protest what they saw as inadequate financial aid policies. This protest inspired similar actions at other universities across the country.

The student activism of the 1970s helped to bring attention to the issue of college affordability and student loan debt. As a result, Congress began to take a more active role in regulating the student loan industry. In 1974, the Higher Education Amendments of 1972 were amended to create the National Direct Student Loan (NDSL) program, which provided low-interest loans directly from the federal government to students.

The NDSL program was a significant departure from the FFEL and GSL programs, which relied on private lenders to provide loans. The NDSL program was designed to cut out the middlemen and provide loans directly to students, which would reduce costs and increase accessibility. Under the NDSL program, students could borrow up to $2,500 per year, with a total lifetime borrowing limit of $10,000.

The Rise of Private Lenders: 1980s

Prior to the 1980s, the majority of student loans were provided by the federal government through programs like the Federal Perkins Loan and the Federal Family Education Loan (FFEL) program. However, as the cost of higher education continued to rise, the government struggled to keep up with demand for these loans. In addition, many borrowers found the application process for federal loans to be cumbersome and slow. In 1980, the federal government began phasing out the FFEL and GSL programs in favor of the Direct Loan program, which provided loans directly to students from the federal government. The Direct Loan program was designed to simplify the student loan process and reduce costs. It also provided more funding for low-income students, who had historically been underrepresented in the student loan market.

The 1980s saw a significant rise in the number of private lenders offering student loans. This shift was the result of a number of factors, including changes to federal student loan programs and a general trend towards deregulation in the financial industry. In response to the issues listed above, private lenders began to enter the student loan market in the early 1980s. These lenders saw an opportunity to provide loans more quickly and with less bureaucracy than the federal government. They also believed they could make a profit by charging higher interest rates than federal loan programs.

To encourage this shift towards private lending, the government began to offer guarantees for private student loans under the Higher Education Amendments of 1986. This meant that if a borrower defaulted on a private loan, the government would reimburse the lender for a portion of the outstanding balance. This guarantee made private lending less risky for lenders and helped to fuel the growth of the industry. This legislation eliminated the need for schools to participate in the FFEL program and allowed them to participate in a new program called the Federal Direct Student Loan (FDSL) program. The FDSL program allowed students to borrow directly from the federal government, rather than from a private lender.

Another crucial factor that contributed to the rise of private lenders in the 1980s was the broader trend towards deregulation in the financial industry. The Reagan administration was known for its emphasis on deregulation, and this philosophy extended to the student loan industry. As a result, private lenders faced fewer regulations and were able to operate with greater flexibility than they had in the past.

Despite the growth of private lending, federal student loan programs remained the dominant source of student loans throughout the 1980s and into the 1990s. The emergence of private lenders, however, provided borrowers with more options and helped to increase competition in the market. This, in turn, may have helped to push down interest rates and other costs associated with borrowing for higher education.

The Clinton Administration and Student Loans: 1990s

During the Clinton administration, there were significant changes made to the student loan program in the United States. The Student Loan Reform Act of 1992 increased the maximum amount of money that students could borrow and reduced interest rates on student loans. Additionally, the Higher Education Amendments of 1998 created a new program, the William D. Ford Federal Direct Loan Program, which replaced the Federal Direct Student Loan (FDSL) program. 

These changes aimed to make higher education more accessible and affordable for students. The Clinton administration also introduced the Hope Scholarship tax credit, which provided tax incentives for families to save for their children's college education. Overall, the Clinton administration's efforts aimed to increase access to higher education while also making it more affordable for students and their families.

Private Lenders Gain Market Share: 2000s

In the early 2000s, private lenders gained a significant share of the student loan market. Private lenders were able to offer loans with lower interest rates than those offered by the federal government. This made private student loans more attractive to borrowers who wanted to save money on interest.

Meanwhile, the cost of higher education was continuing to rise, and many borrowers found that federal loan limits were not sufficient to cover the full cost of attendance. Private lenders saw an opportunity to provide additional funding to these borrowers and began to offer private student loans with higher borrowing limits and more flexible repayment options than federal loans.

Private lenders also began to aggressively market their loans to students and their families. Many lenders offered incentives such as lower interest rates, cash-back rewards, and fee waivers to entice borrowers to take out loans with them. Some lenders even marketed their loans directly to colleges and universities, offering schools financial incentives to promote their loan products to students.

The growth of private lending, however, was not without controversy. Several critics argued that private lenders were engaging in predatory lending practices and taking advantage of vulnerable borrowers. In response, the government implemented a number of regulations aimed at protecting borrowers, including requiring lenders to disclose the full cost of borrowing and limiting certain marketing practices. In 2005, Congress passed the Deficit Reduction Act which cut federal subsidies to private lenders that participated in the FFEL program. This made private student loans less profitable for lenders, which caused many lenders to exit the student loan market.

Despite these regulations, private lenders continued to gain market share in the student loan industry throughout the 2000s. At the same time, the private lenders of student loans increasingly securitized student loans into investible bonds, not unlike what was going on with mortgages and mortgage-backed securities in the 2000s. By the end of the decade, private loans accounted for approximately 20% of all student loans, up from just 5% in the early 1990s. While federal loans remained the primary source of funding for most borrowers, the growth of private lending provided additional options and helped to increase competition in the market.

Rise of Income-Driven Repayment Plans: 2010s

During the 2010s, the federal government began to offer income-driven repayment plans for student loans. Income-driven repayment plans allow borrowers to repay their loans based on their income and family size. If borrowers have low income or high debt, they may qualify for a lower monthly payment.

In 2010, President Obama signed the Health Care and Education Reconciliation Act which eliminated the FFEL program and made the William D. Ford Federal Direct Loan Program the only federal student loan program.

In 2013, President Obama introduced the Pay As You Earn (PAYE) repayment plan, which caps monthly payments at 10% of a borrower’s discretionary income. In 2015, President Obama introduced the Revised Pay As You Earn (REPAYE) plan, which expanded the PAYE plan to more borrowers and made it easier to qualify for the plan. Income-driven repayment plans have become increasingly popular among borrowers who are struggling to make their loan payments.

Student Loan Debt Crisis: 2010s

The student loan debt crisis has become a major issue in the United States during the 2010s. As of 2023, the total student loan debt in the US is over $1.7 trillion, and over 44 million Americans have student loan debt. Many borrowers are struggling to make their loan payments, and some are defaulting on their loans.

In response to the student loan debt crisis, there have been several proposals to reform the student loan system. Some proposals include making college more affordable, forgiving student loan debt, and expanding income-driven repayment plans. However, there has been little progress in enacting these proposals due to political disagreements and budget constraints.

The Bottom Line on the History of Student Loans

Student loans have undergone significant changes since their inception in 1958. Private lenders have gained market share, income-driven repayment plans have been introduced, and the student loan debt crisis has become a major issue in the US. While there have been proposals to reform the student loan system, little progress has been made due to political disagreements and budget constraints. As the student loan debt crisis continues to impact millions of Americans, it is clear that more needs to be done to address this issue.

Fortunately, there are more ways than taking out student loans to help pay for college tuition. You can lower the burden of tuition costs with the scholarships for undergraduate students offered by BrokeScholar. BrokeScholar hosts a vast library of scholarships for undergraduates, but also provides a collection of scholarships for graduate students as well.

Andrew DePietro

Author: Andrew DePietro

Senior Researcher, and Content Strategist

Andrew DePietro is a finance writer covering topics such as entrepreneurship, investing, real estate and college for BrokeScholar, Forbes, CreditKarma, and more.