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Given the chance to start from scratch, it’s hard to imagine that anyone would design the student-loan system we have today. There’s a lot of complexity. Students can borrow through several different federal loan programs, and when those loans come due, borrowers can choose from a number of repayment plans.
Loans have become the dominant type of federal student aid and a typical part of the student experience—some 70 percent of bachelor’s-degree recipients now graduate with debt. But there’s a lot we still don’t understand about defaults, debt levels, and the effect loans have on borrowers’ lives. And even getting the data required to investigate some of these questions is a challenge.
So how did we get here?
A short film from the Lumina Foundation and the Institute for Higher Education Policy, set for release on Wednesday, has some answers.
The film (which you can watch here) weaves together recollections of policy influencers to create a history of student loans, mixing observers’ accounts, a peppy soundtrack, and old collegiate photographs to create a surprisingly engaging history.
The first inclination by the groups that created the film was to write a report, says Zakiya Smith, a strategy director with Lumina. But the groups decided instead to try a video format, which they thought would be more attention-getting. It might even sate curiosity that extends far beyond the Beltway.
Here are three key moments it highlights:
How Student Loans Came to Be
The film traces the idea of a student-loan program to the 1950s, when well-off families in Boston were worried about paying to send their children to elite colleges. At first, those families intended to set up a scholarship fund, but they realized that a loan program would be cheaper. That set a precedent for policy makers.
Federal loans were subsequently included in the National Defense Education Act of 1958. And they were woven into the 1965 Higher Education Act to appease lawmakers by expanding President Lyndon B. Johnson’s college-affordability efforts to the middle class.
“The deal was, you can have your scholarship program if you give us also a loan program,” Thomas Parker, a senior associate at the policy institute, says in the film.
How Student Loans Spread
In the early 1990s, “the rising price of higher education was creating more and more barriers,” Jamie Merisotis, president of Lumina, says in the film. So the government increased the amount that students could borrow through the federal loan programs. “There was not an intent to create more debt,” Mr. Merisotis says. “There was an intent to create more opportunity.”
The unsubsidized Stafford Loan program, which students can use even if they don’t have financial need, was added at the same time.
Student loans were originally meant to bridge the gap for middle-income students. But over time, they were extended to those from more-affluent backgrounds. And with grant aid and family income trailing rising college prices, debt became widespread among low-income students, too.
And students weren’t the only ones borrowing anymore. The 1980 creation of the PLUS loan program—which lets parents of dependent students borrow up to the cost of attendance, minus other aid—extended federal loans to a whole new group.
How Repayment Got So Complicated
As students’ debt levels rose, “the fear was that once they got out of college and got into repayment, that they would be hit with a bill that they might not be able to afford initially,” says Richard Jerue, director of education, outreach, and strategic initiatives at the Charleston Gaillard Center.
That led to the creation of an “income contingent” repayment system, in 1993. But that option applied only to loans offered directly by the government, not those issued through the federal bank-based system that was then larger.
A new income-based repayment plan was introduced in 2007 because “it was thought at the time that trying to combine it with income-contingent repayment would be complicated and it was easier to just create a new plan,” explains Pauline Abernathy, vice president of the Institute for College Access and Success, or Ticas.
The landscape was further complicated by the addition, a few years later, of a more-generous “pay as you earn” plan. While each repayment plan was created for a reason, “everyone agrees that’s too many,” Ms. Abernathy says.
The film also illustrates how good policy ideas can be bungled, and bad ones knowingly pursued, due to politics or changing circumstances. It’s not as if anyone ever set out to create a perfect loan system for 2014.
“The extent to which people should be relying on loans, and the extent to which they should be subsidized by the government, is something that we’ve come to not by design, so much as by accident and by the political dictates and by the dictates of the federal budget,” says Sandy Baum, a research professor at George Washington University’s Graduate School of Education and Human Development. That’s a useful caution for everyone who’s dreaming up new policy proposals today.
The film is being released along with a companion film about campus-based aid programs. Two more short films are scheduled to come out in January.
