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In the News: Federal Student Loan Reform
03/29/10
The Obama administration’s landmark health-care reform bill contains a little-discussed provision that makes sweeping changes to the federal government’s student-loan programs. The provision eliminates private lenders as intermediaries and makes all student loans come directly from the federal government. The estimated cost savings of $61 billion over 10 years will be used to increase Pell Grants for needy students and invest in community colleges.
The U.S. government has a long history of investing in the college education of its citizens. The Servicemen’s Readjustment Act of 1944, better known as the G.I. Bill, provided federal funds to allow servicemen returning from World War II to attend college. The National Defense Education Act of 1958—created in the aftermath of the Soviet Union’s launch of the first artificial satellite into space—boosted federal funding for math and science education and established the first low-interest college loan program for qualified students.
The modern federal student loan program was established by the Higher Education Act of 1965. In his remarks upon signing the legislation, President Lyndon B. Johnson declared that “this act means the path of knowledge is open to all that have the determination to walk it.” Due to government budgetary restrictions, the loans were administered by private lenders and guaranteed by the federal government.
In 1993 the government established a direct student loan program as an alternative to the costly subsidies and guarantees provided to private lenders. This program competed against the guaranteed loan program for many years, which encouraged banks to lobby colleges and offer incentives for choosing the subsidized system. The Obama administration’s 2010 overhaul eliminates private lenders entirely and moves to a full direct federal student loan program.