History of Student Loans

by Michael Ambrose and Evan Cooper

According to Finaid.org, the first student loans system was established by Harvard University in 1840. Harvard’s formation of the student loans system by Harvard was well before its time, and it would be 27 years until the United States’ Department of Education – let alone the advent of the federal student loans that many rely on.

In 1935, Indiana was the first state to form a financial aid association, nine years ahead of the GI Bill, the first type of federal program for funding education of its kind. Because of the GI Bill, in 1947, 49 percent of college enrollees were using federal money to fund their education. Forty-nine percent of all college students was good for 7.8 million people. The GI Bill has been in effect since its establishment.

The next advancement in student loans came in the National Defense Education Act of 1958, when President Dwight Eisenhower created low-interest student loans to foster science and technical education following the launch of Sputnik.

President Lyndon Johnson continued student loan reform in 1965 as part of the presidents “war of poverty.” The Higher Education Act was designed for students from low-income families, and was designed with a safety net for students who took advantage of the act. The act set up loans to be given out through private lenders, and once the student was out of college and defaulted on the loans, the federal government would make the payments.

The last major shift in student loan’s policy occurred during the recession of 2008. With credit markets in free fall, less and less money was available for students through private lenders. Today, the majority of students can borrow directly from the federal government at lower interest rates than through private lenders. 

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