The Wild Origins of Our Student Loan Crisis

A people without the knowledge of their past history, origin, and culture is like a tree without roots. Marcus Garvey

Don’t go to sleep! Our history lesson won’t take long—and it will be anything but boring.

In 1958, the first student loans were offered (as well as grants and scholarships) to help the U.S. compete globally. Until 2007, we had the student loan regime that was put in place in 1965 under the Higher Education Act. These loans—commonly known as FFEL loans (Family Federal Education Loans)—were originally just stop gap measures. Because the average tuition for a public 4 years school was roughly 10% of the average one year’s salary at the time (70s-80s). Back then, a student could work summers to afford their tuition or pay back the loans within a year or two after graduation and getting a job without too much constraint. These FFEL loans were lent by banks and insured by the federal government, just like mortgages are today (that will be important later).

The rising cost of tuition over the years plays a big part in the story. It stayed at a relatively slow climb until the late 1980’s/early 1990’s; and then it started to pick up speed. At that point, depending on where you get your numbers, tuition rose 7-9% each year (on average); and it exploded in the late 2000’s. Meanwhile, the average household income adjusted for inflation hasn’t gone up that much. Again, depending on where you get your numbers, in the 1980’s, average income was roughly $40,000 (adjusted for inflation); and today the average is about $53,000. Now, it doesn’t take a math wizard to see that if the cost of something outpaces inflation—meaning that the cost gets bigger but the way we afford to pay for it doesn’t keep pace—then it will be harder to obtain. So more and more people relied on more and more student loans to cover the cost of college.

Pretty simple right? Just wait.

Parents couldn’t afford to send their kids to college anymore—at least not paying out of pocket—so people took out more and more student loans. (Many parents refinanced equity from their homes to cover the cost of college, but that solution obviously wasn’t for everyone.)

Early changes started happening in the 2000’s under George W. Bush. The government introduced Public Service Loan Forgiveness; IBR; and the Direct Loan—a loan issued “directly” from the Department of Education. In other words, our IRS tax dollars that fund the Department of Education was lent to students and colleges in the form of student loans. And nobody batted an eye as this lending-money-for-education system reached an astronomical $300 billion by 2007.

The student loan landscape today, just 10 years later, is beyond bleak—$1.4 trillion of debt today spread over 44 million Americans.

Just take a moment to breathe that all in. 44 million Americans. $1.4 trillion of debt.

Even worse—every single year, roughly 2.5 million graduates leave college with student debt. As of summer 2017, the average debt is $37,000. If nothing changes, those numbers are set to double in the next 10 years. That would be 2.8 trillion spread over 65 million Americans, roughly. Whew.

So that’s some background information—how the seeds were sewn for the student debt debacle. The story continues in our next post!