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Student Loans: Financial Aid for Economic Competition

Financial aid for economic competition, what does that mean?

And what does it have to do with student loans? Well, it has a lot do to with it.

And the history of student loans will reveal the relationship between the two. If you understand the original purpose of student loans, then it’ll become clear.

Why were student loans created?

October 4, 1957 – the Russians successfully launch the world’s first satellite, Sputnik.

Ok, but what could that possibly have to do with student loans? More than you may think. You see, the launching of Sputnik was the firing of the starting gun to begin the space race between the U.S. and the U.S.S.R. That prompted the U.S. to see the advantage of educating and training its own people to create similar projects.

Now, how could they do that, when post-secondary education cost so much money and not everybody had enough.

Well, by that time, consumer financing had already poked it’s accommodating head out, offering immediate possession of big-ticket items, with an extended period of time to pay for them.

Why should the cost of education be any different? Consumer loans could be converted into student loans. It’s quite a stretch, but the connection’s there, nonetheless.

So student loans were designed to put many students who wouldn’t have ordinarily been able to afford higher education, into colleges and universities such as Columbia University. The U.S. government actually believed that education was the primary responsibility of the parents.

But they also recognized that many parents just couldn’t afford to send their children to college, no matter how much they wanted to.

The idea of financial aid started in 1935

While all this was going on, the actual idea of financial aid for students had been introduced in Indiana in 1935. The Indiana General Assembly legislated mandatory fee remission awards to students on the basis of competitive testing.

Subsequently, the Indiana State Financial Aid Association (ISFAA), the first state financial aid association, was formed. In the early 1940s, the Financial Aid Office was created by Indiana University, functioning independently from Student Services, who had taken care of such matters up to that time.

The ISFAA was run well, which encouraged other colleges, both private and public, to join the Association.

Through the years, the ISFAA underwent changes in their makeup, moving from a constitution-based organization to one of by-laws. From 1957-1960, when they finally settled on a solid foundation, they assisted the government in creating programs and training opportunities.

You see, financial aid was a rather involved business, so the Association needed the training programs to teach each other ways of offering financial assistance. They developed and hosted a program that became very successful over the years.

The U.S. government looked for ways to educate their young

From the outset of the baby boomer age, the U.S. federal government was trying to increase the number of Americans entering college. They were constantly looking for programs that would allow more and more students to go to college. The result of these efforts was a number of programs made available to students from low- to middle-income families.

One of the first acts the government passed after WW II, was the National Defense Education Act, which was designed to revitalize public and private education.

This was the act that was specifically introduced as the result of the launching of Sputnik, driven by the government’s desire to be #1. This program is still in effect today, but the name’s been changed to the Federal Perkins Loan program. The program offers low-interest (5%) student loans with up to 10 years to repay, with preference being given to low-income students.

A number of programs were introduced over the next few years, all with the purpose of making it easier for the “common joe” to get a student loan and a higher education. A few of those programs are:

  • The Health Education Assistance Act, 1963, which offered loans to medical and health program students.
  • The College Work-Study Program, 1964 (now called the Federal Work-Study Program). In this program, the federal government pays for most of students’ earnings so, in effect it covers their educational expenses.
  • The Educational Opportunity Grant Program, 1965, which was created specifically for low-income students who couldn’t afford college. No repayment was required.
  • The Guaranteed Student Loan (GSL) Program, 1965, which is also still in effect today. It’s name was changed in 1988 to the Federal Stafford Loan Program. This program provided more money for student loans through banks or lending agencies, to offset rising education costs.
  • The Middle Assistance Act, 1978, provided student loans to middle-class families. This act, in effect, removed the income limit on federal aid programs.
  • The Parent Loans for Undergraduate Students Program, 1981, allowed upper-income families to get student loans, but at much higher interest rates.

You can see that the pattern of these programs followed a definite path – they went from emphasis on campus-administered aid programs in 1965, to a basic grant approach in 1972, to an inclusion of lower income as well as middle income families in 1978. The evolution of student loans was very diverse and constantly changing.

Somebody needed to administer all these programs

The pile of paperwork to complete all the loans given out with these programs was sky-high. With insight, in 1966, the National Association of Student Financial Aid Administrators (NASFAA) was created for exactly this purpose.

At the beginning, their political influence was weak. But by 1976, they’d risen in prominence and, by 1978, they were playing a significant role in drafting financial legislation. Today NASFAA is the largest institutionally-based membership organization promoting the interests of student financial assistance. They’re in a positive position of leadership.

Government financial aid programs never lost sight of their original goal

Remember, the goal of financial assistance programs was to get more students into colleges and universities. The Reagan administration pushed for equal education opportunity programs; his opposition argued that those programs gave assistance to those who didn’t need it.

However, the goal was always to create programs that offered assistance to those who needed it the most. Legislation was adapted to reflect this thinking.

All of the afore-mentioned programs, if you follow the path of money transfer, were ultimately funded by the U.S. Department of Education.

As of 1983, that Department had paid out over $6 billion for student aid. However, a downside began to emerge. All these student loans added up – in the students’ liability columns. And if they wanted further education, they had to get more loans to cover the rising costs.

Students were allowed to get more loans on top of the ones they already had. And now, they found themselves in the same position as the general consumer – up to the eyeballs in debt.

So in 1983, to take away the students’ stress so they could concentrate on their studies, the Student Loan Consolidation and Technical Amendments Act was introduced, allowing them to consolidate outstanding student loans into Guaranteed Student Loans (8% interest), with longer repayment periods.

As education costs rise, student loan sources change

The rising cost of education made it more and more necessary for students to get loans to cover their educational expenses. More government legislation was needed. In 1992, the Higher Education Act focused on unsubsidized loans which allowed students from any income level to get a federally-guaranteed government student loan.

Then, in 1993, the Budget Reconciliation Act included the William D. Ford Federal Direct Student Loans program. This program allowed students to borrow directly from participating schools who, in turn, got funds directly from the U.S. Department of Education.

Canadians had the same challenges

Meanwhile, up at the ranch –well, up north in Canada – Canadian students had the same challenges as their neighbors to the south. The goal of Canadian education programs was to give their young people the opportunity to learn the skills necessary to compete in the economy of the 21st century.

Canadian college education costs were less than in the U.S., but it was still a challenge for many students to be able to afford university educations. Government cutbacks led to direct financial student assistance; that is, universities were no longer supported by the federal government, so programs were created to provide assistance partially from the federal government and partially from the provincial government.

In 1964, the federal government created the Canadian Student Loan Program (CSLP). From their inception, until 1995, all student loans came from financial institutions and were offered to all approved students. The financial institutions also administered these loans. The government guaranteed the loans by reimbursing the financial institutions if the loans were in default.

In 1995, the government shared the risk with the financial institutions in return for fixed payments from the government. As of July 31, 2000, that agreement has ended. Now the government directly finances all new loans, with the administration being done by the newly-formed National Student Loans Service Centre (NSLSS).

Also, federal and provincial loans have been integrated, so the borrower has to make only one payment for his student loans, instead of the previous payment for each.

The NSLSS has, to date, assisted over 3.8 million students with over $16 billion in loans since it was founded.

Student loans are meeting their goals

It’s evident that student loans are doing what they were designed to do. They’re giving everybody an equal opportunity to get an advanced education. If you look at the number of successful professionals today who needed that higher education – sometimes 5-7 years – you can see that student loans work.

Some of those people, without that education, may be driving you to the airport today as taxi drivers, or serving you a cocktail as a waiter or waitress.

The original goal of student loans was to give everybody an equal chance to get a post-secondary education if they so wished, based, not on what they could afford, but on where they wanted to go in life. And as fully-educated people enter the work-force, they are, indeed, with the help of their financial aid, providing economic competition around the world.

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