A fairly high percentage of borrowers graduate from high school or college with large debts. This is due to student loans that people take out to pay for their education. Student loans once seemed like a great solution for people who couldn’t afford college. But how did a system designed to help people become a trillion-dollar problem?
When Did Student Loans Appear?
Student loans are the primary way to finance higher education in the United States, and they are used by hundreds of thousands of borrowers. Student loans were created in 1958 with the National Defense Education Act. This was the first federal student loan program created during the Cold War. The United States government believed that if the country wanted to remain a leader, it needed specialists, especially in engineering, mathematics, and foreign languages. Having the ability for students to borrow at low interest rates made it easier to access education in the fields they wanted to study.
At that time, the government believed the country needed brains to develop. After all, educated people can develop technologies and innovations that make the country competitive. So, the government began to pay more attention to students and their further education. Gradually, more and more students received assistance, not only those associated with the defense industry.
Later, the Perkins program was created to target low-income students. These loans had low interest rates and flexible repayment terms, making them affordable for many. Federal grants were also introduced, which did not have to be repaid. This made it possible for even more students to get an education without getting bogged down in debt.
Thus, student loans began to help the country during the Cold War era and became an important mechanism for supporting education. They helped many students from different backgrounds to obtain higher education and opened up opportunities for careers and self-realization.
Development of the Student Loan System
The student loan system began to develop in the 1960s and 1970s. By that time, the US government was trying to make education more accessible, so new programs for students were emerging. One of them was the Federal Student Loan Guarantee. Students from different families could take out a loan for education. The main advantage was that the government acted as a guarantor of the loan. This reduced the risks for banks and made it easier for students to access money for education.
Among the first developments was the passage of the Education Assistance Act of 1972. It allowed private banks to issue student loans under government supervision. If a student could not repay the loan, the government would bail out the bank with money. The increase in the number of lenders made loans more accessible to students.
The Pell Grant program was created in 1972. It helped students from low-income families, and unlike loans, this grant did not have to be repaid. Thus, it became possible for students from low-income families to get an education without any debt.
In the 1970s, the number of students increased again, and additional support measures were needed. More and more people wanted to get a higher education, and for many, financial aid was the only way to do so. Therefore, the development of loan and grant programs helped many students study and develop the country’s economy.
Thus, in the 1960s and 1970s, the foundations of the modern student loan system were laid. The state and private banks worked together to make education accessible to many people.
Credit Boom: 2000s
Dramatic changes happened in the student loan system in the 2000s, especially after 2008, when an economic crisis harmed many families. People either lost their jobs or started to earn less money, making it hard to pay for one’s child’s education. Students had to depend more on loans to pay for tuition, housing, and other things.
One reason was a sharp rise in the cost of education. During the last twenty years, the cost of receiving education in American universities and colleges has increased by 150-200%. Consequently, getting an education turned out to be much more expensive, and not every family could cope with such costs without loans. For many students, loans became the only way to get an education.
In addition to government programs, private banks began to enter the student loan market. They issued their version of student loans that could replace or supplement government loans. However, these loans had even higher interest rates with stricter repayment terms, increasing student risks. Private loans gained popularity because federal funds typically did not cover all costs.
Further complicating factors arose in the form of the COVID-19 pandemic in 2020. The virus further exacerbated families’ financial situation, as some people lost their jobs and others faced a reduction in income. This forced even more students to take out loans and continue to earn income from their education. The situation showed how much students depend on loans to continue their education.
Modern Problems of Student Debt
Today, student debt in the United States exceeds $1.7 trillion, affecting millions. The average college graduate leaves about $30,000 in debt, but many students owe much more. This creates major financial problems for young people just starting their careers.
One of the biggest challenges is paying off loans. Graduates often need help paying off their debts. Their income after graduation is usually not enough to cover their daily expenses and loan payments. Finding a job can also be difficult, especially without experience. All this leads to late payments, and it becomes even more difficult for borrowers.
The consequences of student debt are very serious. Young people with large debts are not able to freely manage their money. They have difficulty saving for important things, like buying a home or starting a business. Instead of building their future, they are forced to pay off loans for many years, which slows their growth.
Another problem is the rise of inequality. Students from low-income families and minorities often take out more loans to pay for school. As a result, they start their careers with more debt than others, which makes it difficult for them to develop financially and makes them vulnerable.
Reforms and Solutions
In recent years, many ideas have emerged to improve the student loan system and help students cope with their debts. One solution is debt forgiveness programs. For example, the PSLF program allows people working in the public sector to get rid of their debts after 10 years of regular payments. Some plans help set low monthly payments depending on the borrower’s income.
At the state level, they are discussing how to help students. One proposal is to reduce the cost of tuition at public colleges and universities, which would make education more affordable. They also want to make the terms of loans more flexible, for example, by extending repayment periods or reducing interest rates.
In addition, there are other ways to finance education. Students can attend colleges with low tuition. Some programs allow you to work while studying and earn money. You can also get scholarships and grants that do not need to be repaid to cover part of the cost of education.
Cooperation between the state and the private sector can also help. Private companies can offer scholarships and paid internships, and the government can develop debt forgiveness programs and support flexible lending terms.