I have some news for you, 44.2 million Americans have outstanding student loan debt and that gigantic number is only getting larger every day.
For the first time in history, student loan debt has surpassed consumer credit card debt and is rising at a pace of $76 billion every year. To put this into better perspective, total student debt is over $1 trillion dollars. In fact, it’s so large it actually makes up about 7% of the entire country’s total national debt.
Needless to say, this is some scary shit.
So why is this happening?
Why are millions of young American’s taking on this much debt in such a questionable economic climate?
and more importantly,
Who started this student loan thing? and Where did student loans come from?
To answer these questions and understand more about our current crisis, I had to go back in time to its birth, to the postwar era of the 1950s.
The year is 1958, and as always, the United States is in fierce competition with the Soviet Union.
The Russian launch of the Sputnik satellite in the previous year put the United States on alert and created a negative public perception of weakness. Particularly, in the field of technology and science.
To tighten the race and beat Russia at the space game, the US needed to fill the country with more brain power. To get this done and to reverse the negative perception of the country’s intellectual weakness the needed a quick solution. And with that, the Eisenhower administration passed the National Defense Education Act of 1958 (NDEA).
What followed next was the formation of NASA and the first ever public student loan program. In order to increase the domestic supply of braniacs needed to beat Russia, the NDEA provided government financial assistance through the first ever educational subsidy via the National Defense Student Loan program.
Initially, the funds were available as grants rather than loans, and money was disbursed to only select areas of STEM studies. But Congress didn’t want any free loaders, and with a little bit of political pressure, they passed a law which made everything loan based.
Like a drug addict, the government was hooked on loan interest income. This led them to further continue expanding student loan programs by passing the Higher Education Act of 1965 (HEA).
Logically, this makes perfect sense. In order to make more money from interest, the government had to finance more loans. And they did this by making loan money more accessible to anyone who wanted it.
A recent report published by NY Federal Reserve staffers, suggest that recent expansions to student credit lines grew student loan origination from $53 billion to $120 billion dollars. More loans=more interest income.
Additionally, the government keeps changing the rules and terms of the HEA. Some amendments to the act are in our favor and others are not.
For instance, the amendment of 1998 contains the Aid Elimination Provision. This little doozie stops any potential students with drug charges from receiving federal aid. So if you are poor and made a dumb mistake when you were a kid, you can forget about college.
In hindsight, maybe being unable to take on student debt is a blessing in disguise. Or maybe, the public servants in congress were high as fuck when they slipped that in. Whatever the reason, you can see that provision in action on question 23 on the FAFSA application.
Despite frequent changes over HEA’s lifespan, the most significant of changes came in 1976 and 2008.
Prior to 1976, student loan debt was not protected from bankruptcy, but Congress passed a provision which began protecting federal investments.
Business is slow? Fuck you pay me.
According to a 2015 consumerist article, ” the first version of the law put a ban on bankruptcy for the first five years of a student loan’s origination.” In simpler terms, you were restricted to discharge student loans with the first 5 years of the loan’s disbursement.
This law later changed to extend the five year period to seven years, and was changed again to remove the provision in its entirety. Effectively tying the debt to your life and drastically decreasing the chance of a bankruptcy discharge. To make matters even worse for consumers, this bankruptcy debt shield was also passed on to private student loans, in 2005 with the passage of the bankruptcy reform bill.
As mentioned earlier, some amendments were actually to the benefit of consumers. Especially the 2008 amendments under President Barack Obama. These changes include better protection for disabled people, as well as those struggling in repaying their debts. Obama’s administration, also lowered interest rates on subsidized loans, capped repayments at a percentage of discretionary income, and pushed through a loan forgiveness option to those working in the public sector.
To summarize; What originally began as an incentive to improve the quality of our education and build an army of braniacs, ended up backfiring due to a lack of oversight.
More available money for school led to increased competition for students between schools. A higher demand for college degrees from students, caused tuition to rise and state funding to decrease. This high demand for college degrees is causing the schools to expand and build larger facilities to house all these revenue streams (aka students). With more emphasis placed on space instead of education quality, are students getting the short end of the stick?
What do you think? Did the cost of your education give you a positive return on your investment? Do you think you could of done better or worse on your own? Let me know in the comments below.
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