The History of Student Loans and How It Affects You Today

history of student loans

Maybe it feels like your student loan servicer robs your bank account on a monthly basis, but imagine how 13th-century Oxford University applicants felt.

Using the first documented student loan system in 1240, aspiring scholars had to deposit their valuable possessions — anything from precious metal cutlery to handmade animal-skin books — in wooden chests to secure educational funding.

About 600 years later, in 1838, Harvard University students didn’t need collateral to prove their neediness. The Ivy League school offered zero-interest loans to students who could not afford to attend.

What followed in the U.S. was nearly 200 years of changes to how students pay for a higher education. By now, you’re likely familiar with the results.

As of 2017, there is about $1.4 trillion in national student loan debt, shared by 44 million borrowers. The average 2016 graduate left school $37,172 in the red.

With how far we’ve come, it’s worth asking how the heck we got here. Here’s a look at the history of student loans in the U.S., and how it matters.

10 events that shaped student loans in America

1944: The G.I. Bill

With the U.S. winding down its World War II efforts, the country needed to redeploy millions of military members — into society.

President Franklin D. Roosevelt signed this bill into law on June 22. As part of the bill, veterans were given up to $500 per school year to help cover educational and living costs. The 1952 Veterans Readjustment Assistance Act extended these benefits to Korean War veterans.

So what? Still in practice, this legislation helps military members afford an education. In fact, the U.S. Department of Veteran Affairs offers a G.I. Bill Comparison Tool to help veterans compare benefits offered by schools.

1958: The National Defense Education Act

Consider this one spurred on by Sputnik, the then-Soviet Union’s orbiting satellite. For the U.S., a loss in the so-called Space Race was enough to move forward on federal funding for higher education.

NDEA student loans were meant to target the study of science, math, and foreign languages. It undoubtedly had more general application; from 1960 to 1970, national college enrollment grew from 3.6 million to 7.5 million.

So what? This law was America’s first successful foray into federal aid for college education. A precursor to the Federal Perkins Loan Program, it set the stage for the House and Senate to make college more accessible for students. On Sept. 30, 2017, however, the Perkins Loan Program expired.

1965: The Higher Education Act

Signed on Nov. 8 by former President Lyndon B. Johnson, this law gave federal funds to state schools for, in part, low-interest loans. The Student Loan Marketing Association (more famously known as Sallie Mae), was born in 1973 to service these loans.

So what? The legislation has been amended and reauthorized eight times by the U.S. Congress and continues to support higher education. Sallie Mae has since transitioned from a federal loan servicer to a private lender.

1972: The Basic Educational Opportunity Grant

A significant moment in the history of student loans was The Basic Educational Opportunity Grant. This law was renamed in 1980 for Senator Claiborne Pell, a Rhode Island Democrat who led the effort to get it passed. Pell Grants were designed to offer gift aid to needy students.

So what? Still in existence today, the maximum award for 2017-2018 was set at $5,920. For students with low-income backgrounds, Pell Grants offer financial aid without adding on student debt.

1992: The Higher Education Amendments of 1992

In the course of reauthorizing the Higher Education Act of 1965, this 1992 legislation resulted in two key milestones: the creation of the Free Application for Federal Student Aid (FAFSA) and the addition of unsubsidized Stafford loans.

So what? For many students, the FAFSA is a key element to securing financial aid for higher education. Meanwhile, unsubsidized Stafford loans are another way for students to fund their college years.

2001: The Economic Growth and Tax Relief Reconciliation Act of 2001

This law, signed by former President George W. Bush, improved upon legislation former President Bill Clinton signed in 1997.

Under Clinton, only the first five years of interest payments on student loans were tax deductible. Bush removed the five-year rule.

So what? Today, the Student Loan Interest Tax Deduction helps qualifying taxpayers deduct up to $2,500 of interest payments each year. This helps make repaying student debt a little more affordable.

2007: The College Cost Reduction and Access Act

Also signed by Bush, this landmark legislation made student loan repayment more affordable with two key additions: Income-Based Repayment (IBR) and Public Service Loan Forgiveness (PSLF).

So what? IBR makes student loan repayment more affordable by capping payments and forgiving the debt after 20 or 25 years of repaymentPSLF, meanwhile, forgives loans after 10 years of repayment for individuals working for a qualifying employer.

2010: The Health Care and Education Reconciliation Act of 2010

This act eliminated the Federal Family Education Loan (FFEL) Program, requiring that all new federal loans be Direct Loans. At the time, FFEL was the second-largest loan program for higher education.

So what? The act helped fund Pell Grants and cut IBR monthly payments from 15 percent of discretionary income to 10 percent.

2011: The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

In the wake of the Great Recession and the state budget cuts that ensued, former President Barack Obama signed legislation that established the Consumer Financial Protection Bureau (CFPB).

So what? The CFPB is one of the best places to get support for a troublesome loan servicer. The bureau takes steps to protect borrowers from abusive or deceptive financial practices and offers essential education to consumers.

2015: Revised Pay As You Earn

At Obama’s direction, the Department of Education launched the Revised Pay as You Earn (REPAYE) Plan. Also in 2015, Obama unveiled the Student Aid Bill of Rights.

So what? REPAYE expanded on the original Pay As You Earn (PAYE) Plan. It allowed an additional 5 million Direct Loan borrowers to cap student loan payments to 10 percent of their discretionary income. The plan also extended protections to borrowers with Direct Loans. 

Why the history of student loans matters

As student debt balloons in the U.S., understanding student loan programs and your repayment options is important. Knowing how you can better manage your student loans can help you pay down your debt faster or free up money for other financial obligations.

Keep tabs on new student loan programs and legislation that can affect any repayment programs you use. That way, you’re never surprised when changes to your repayment plans roll through.

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