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The 50-year path that left millions drowning in student loan debt

How new student-loan programs turned students into consumers — and ignited a competition among universities that left them drowning in debt

Activists rally outside the White House a day after President Biden announced his plan for student-loan debt. (Craig Hudson for The Washington Post)
8 min

President Biden’s student-loan forgiveness plan, which offers $10,000 to $20,000 in debt relief for millions of Americans, has captured headlines and provoked fierce debate over its fairness, whether it goes far enough and even whether the plan is legal.

The intensity of the fight stems from the fact that going to college is at the heart of the American Dream. At the same time, paying for college has become an American nightmare. Confronting this paradox has made Biden’s plan satisfying to very few, because of the lack of consensus on the topic.

Between 1955 and 1972, college tuition remained relatively affordable for middle-income families, but scholarship aid — whether from colleges, state governments or federal programs — was limited. When colleges offered financial aid, it usually came in the form of small loans and work-study options. California was exemplary in that residents paid no tuition at in-state public institutions. Other states had merit scholarships for a small number of outstanding academic students. At the same time, in some low-tax states, public college tuition was about the same as that at private colleges.

Only about a third of high school graduates went on to postsecondary education. Around 1965, a typical private college charged about $1,500 for tuition (roughly $14,244 in 2022 dollars). But there were exceptions. Rice University, for example, charged no tuition even though its student body came predominantly from prosperous families. Berea College in Kentucky used a zero-tuition policy, which remains in place, to attract regional students from modest-income families.

In 1972, changes in federal student financial aid completely changed everything. A bipartisan majority in Congress enacted programs aimed at making college a viable option for more students from low-income families. The Basic Educational Opportunity Grant Program (later renamed Pell Grants) was the largest initiative. It relied on need-based grants to partially cover tuition and living expenses. Legislators also aimed to entice more banks to participate in the Guaranteed Student Loan (GSL) program established in 1965, which had remained relatively small in scale because of their hesitance to take part.

The programs revolutionized how both applicants and colleges approached admissions and affordability because they treated students as consumers. Congress hoped to give prospective students from underserved constituencies the leverage and resources — plus adequate academic advising and help with filling out forms — to consider college options and make informed choices. That meant giving them federal grants and loans directly, which the students could use to go to the institution of their choice. Legislators chose this structure despite higher education associations lobbying for federal funds to go directly to institutions.

The new laws created an academic marketplace which forced colleges to compete for applicants. Giving students choice was wildly popular, turning student financial aid programs into the second largest category of federal expenditures on higher education, trailing only sponsored research grants to universities. But by not fully paying for college, the 1972 financial aid policies left students and parents grappling with how to cobble together a combination of federal grants and loans along with scholarships from institutions and a family contribution to pay tuition bills.

Another factor contributed to the transformed landscape. With the end of both the military draft — which had driven some young American males to college to get student deferments — and the “baby boom” surge in college applications, universities now had to put increased effort into attracting academically qualified students who could pay college expenses. Admissions offices used their university’s resources combined with federal grants and loans to craft financial aid packages to entice students to enroll, understanding that this was now a high-stakes enterprise.

The new competition and financial aid policies emerged during a period (1970-1985) that Berkeley economist Earl Cheit called “Higher Education’s New Depression” — in which educational institutions were buffeted by declining revenue, a tapering of applications and double-digit “stagflation.” Most institutions hadn’t raised tuition substantially, leaving many of them hard-pressed to pay bills. Many colleges resorted to deferring campus maintenance and freezing hiring. Even elite universities such as Yale reported budget deficits in this period.

At schools that didn’t have academic prestige and large endowments, presidents quickly recognized that enrolling students who had federal financial aid was a good way to keep their doors open. But to be successful, such a strategy required winning the recruitment battle for students from modest means.

The rise of federal loans widened access to higher education but did little to make it more affordable. Rather, as Elizabeth Tandy Shermer has argued, “government-guaranteed loans left generations drowning in college debt.” Why? In part because of a crucial change Congress made in 1978.

That year, legislators passed the Middle Income Student Assistance Act. The MISAA doled out relatively large loans at low interest rates. Importantly, there was no test for financial need and no income limit for participating. Congress approved this program because it placated students from prosperous families who did not qualify for means-tested programs such as Pell Grants. Banks loved the MISAA because the federal government guaranteed loan repayment.

The popularity of the MISAA set a precedent for loans — rather than grants — as a convenient student aid option. By 1985, both college costs and prices accelerated, a pattern that has continued to gain momentum into the present. Colleges, both public and private, adopted a model of “high price plus high cost plus high financial aid” as the dominant strategy.

Colleges increased their costs by spending on new campus services and facilities, which college officials claimed were demanded by students and their parents using their new power as consumers. Career centers, counseling services, climbing walls and luxury dormitories combined with new administrative expenses to increase institutional budgets. Colleges and universities became adept at justifying any increased costs as a response to student demands for added campus services.

And, as Duke economist Charles Clotfelder analyzed, by 1985 about 30 colleges and universities had the combination of prestige and resources to embark on “buying the best,” whether it meant famous professors and presidents or outstanding students. This established a model many colleges tried to imitate in the quest for high ratings and rankings. Colleges passed the costs on to students. In 2002, Cornell economist Ronald Ehrenberg documented how tuition usually went up and seldom went down — a pattern that has continued to the present.

By 2005, private lenders aggressively marketed student loans as a “buy now, pay later” way to cope with unexpected college expenses. This situation was only exacerbated as students at public universities relied on loans to pay for unprecedented tuition increases created by declining state subsidies for higher education. Declining state tax revenue combined with a shift in depicting college as a private good rather than as public good reinforced this major change. Pell Grant recipients discovered that annual renewal amounts did not keep pace with rising prices.

Expanding enrollments and loan debts also were fueled by for-profit colleges and their students, who took out larger loans and ended up with high default rates. Also, beginning in 2006, the government allowed graduate students in advanced professional degree programs such as medicine, law and business to access many loan programs for the first time.

The average student-loan debt for a college graduate in 2020 was about $35,000. Repayment is feasible if a graduate lands a professional position. But the disconnect between higher education and the economy since 2010 made this uncertain for many recent college graduates. According to President Biden: “The burden is so heavy that even if you graduate, you may not have access to the middle-class life that the college degree once provided.”

Today, 45 million student borrowers have $1.6 trillion in student loan debt. That staggering number has the potential to change how American families think about going to college and our investment in higher education. Forty years ago, governors and state university presidents proclaimed that investment in higher education was good for the state economy: “To get a good job, get a good education.” As a result, a college degree was seen increasingly as a necessary passport for students entering the job market.

But this path seems less certain today. Often it is possible for students to get a “good job” without a college degree. And, at the same time, a college degree does not assure a salary that is adequate to cover a graduate’s loan debt. These new complexities mean that Americans may need to rethink the purpose of going to college. Only when we answer that question can we devise coherent and appropriate student-aid programs to make higher education affordable.