The history of the Guaranteed Student Loan is a cautionary tale for anyone interested in public policy. It is also an archetypal example of complex systems theory and how tinkering with one part can change all or some of the parts
It is important to keep in mind that these events occurred cumulatively but not consecutively over a 60-year period. It is also important to note two economic trends. The cost of higher education has risen faster than the cost-of-living index and even higher than the cost of medical services since 1978. The economically resilient middle class has significantly shrunk in the same time with much of the shrinkage at the lower wage scale.
Student loans have a long history in U.S. higher education, but I will start in 1958 with low-cost Direct Student Loans from the Treasury. There were many reasons these loans were a promising idea. Perhaps one of the best reasons was the overwhelming economic success of the G.I. bill. Federal investment in education for veterans resulted in significant economic prosperity throughout the country. Why not have a broader plan? Although a sizeable number of students put together scholarships and work plus family financing to get them through college, the “space race” showed us that we needed more college graduates in the years to come. Some of the best private colleges were still out of reach of students who had the potential to succeed.
By 1965, the government changed to a guaranteed student loan program. This change, prompted by accounting practices within the budget and investors (banks plus private capital entities) noticing that these loans promised profit. Of course, investors wanted to make the largest loan they could, especially since the government guaranteed it. Students covered even the extras with loans. The interest rates were also higher.
For-profit schools, which had specialized in secretarial and low-level medical certificates, began to see potential in both expanded course offerings and higher tuition paid by a guaranteed loan. They targeted “second chance” students who had left high school or not graduated. They had all the financial incentive in the world not to worry much about whether they graduated or got the jobs they trained for.
Starting with voter anger at students who were demonstrating against the war and/or disrespecting their elders in general and pushed by referendums which lowered taxes, states lowered the rate of funding for higher education. Tuition went up, but guaranteed student loans filled in.
The baby boom and more students able to attend college meant that institutions had to expand; more buildings, more staff salaries. Even donated buildings require maintenance. Research grants improved the bottom line, but recruiting expenses soared in the search for the best and brightest to attract those dollars. As majors changed, there was the problem of tenured faculty who didn’t attract enough students to pay for their program.
There is also the problem of over production in some majors and not enough in others. Currently, we have a crisis of graduates in education and medicine. The salary expectations of the former limit students who want to assume loans for that career. The cost of medical school limits the students who want to start out with so much debt. Law school or an MBA is cheaper and requires less time.
After several attempts to deal with just the loan program, it once again is a government loan but administered through the Department of Education. The other forces that pushed the cost of education up remain in place.
I urge Idaho to come up with innovation to ease student loan debt. Perhaps state loans with a percent forgiveness at graduation? Tuition credit for education, engineering, medicine or production management? Credit for moving education and medicine to rural settings? Publicize tax credits for contributions to education? We need young wage earners who have economic resilience to grow our Idaho economy. Student loan debt may hinder it.