Federal Student Loan Program
The federal government began guaranteeing student loans provided by banks and non-profit lenders in 1965, creating the program that is now called the Federal Family Education Loan (FFEL) program. The first federal student loans, however, provided under the National Defense Education Act of 1958, were direct loans capitalized with U.S. Treasury funds, following a recommendation of economist Milton Friedman. But when Congress wanted to expand on that start, budget rules made the guarantee approach seem more attractive.
A number of programs were introduced over the next few years, all with the purpose of making it easier to get an 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. In the same year, Congress created the loan consolidation program so that borrowers could consolidate multiple loans into a single loan with a longer repayment term and smaller monthly payments
- 1988—Guaranteed Student Loans were renamed Stafford Loans in honor of Senator Robert Stafford of Vermont.
- 1989—Student Loan borrowers were first required to receive financial counseling from schools before borrowing.
- 1991—Congress prohibited schools with high default rates from participating in the Guaranteed Student Loan Program.
- 1992—Guaranteed Student Loan Program was renamed the Federal Family Education Loan Program (FFELP) in the 1992 HEA reauthorization. Today, FFELP is a public-private partnership that provides affordable private sector financing for students and their families seeking postsecondary education.
- 1993—After one year as a pilot program in the 1992 HEA reauthorization, the Federal Direct Loan Program (FDLP) became a full-scale program in 1993. In FDLP, loans are financed by the federal government.
- 1999 Direct Lending introduces loan discounts (1% reduction in origination fees and 0.25% interest rate reduction for auto debit) to compete with loan discounts offered by FFELP lenders. (June 16, 1999)
- 2000 Lenders sue the US Department of Education to try to block the Department from offering loan discounts to Direct Loan borrowers without offering similar discounts to FFEL borrowers. The lenders also questioned whether the discounts are cost neutral, as required by the Higher Education Act. The Department believes that these reductions will save the government money by preventing defaults, save students money by reducing costs, and are necessary to level the playing field. Many lenders already offer similar discounts. (November 7, 2000)
- 2002 Public Law 107-139 (February 8, 2002) changed education loan interest rates from variable rates to fixed rates for new loans issued after July 1, 2006. The interest rate on Stafford Loans will be 6.8%. The interest rate on PLUS Loans will be 7.9%.
- 2005 Section 220 of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), P.L. 109-8 amended the US Bankruptcy code at 11 USC 523(a)(8) to include an exception to discharge for “qualified education loans”. Previously only private student loans made by a nonprofit institution (as well as federal education loans) were excepted from discharge.
- 2005 Higher Education Reconciliation Act of 2005 (HERA 2005) (part of the Deficit Reduction Act of 2005) cuts $12.7 billion from student aid: switches Stafford and PLUS interest rates to fixed rates of 6.8% and 8.5% (an increase from P.L. 107-139), keeps maximum Pell Grant at $4,050 for fourth year in a row, gradually reduces loan fees from 4% to 1%, increases some annual loan limits without increasing cumulative loan limits, changes financial aid treatment of prepaid tuition plans, allows graduate and professional students to borrow PLUS loans, eliminates floor income guarantee and some 9.5% loan recycling, adds SMART Grants for less than 10% of Pell Grant recipients, repeals early repayment status loophole, and adds restrictions to School as Lender, among other changes.
- 2007 New York Attorney General’s investigation uncovered lender-college revenue sharing agreements, referral fees and other conflicts of interest lead to multi-million dollar settlements by the largest education lenders. Prominent financial aid administrators and a US Department of Education official accepted stock holdings and payments received from lenders.
- 2008 Congress passed the Ensuring Continued Access to Student Loans Act of 2008 (P.L. 110-227), known as ECASLA, to help avert a crisis in the FFEL program. This legislation allows the US Department of Education to buy unemcumbered Stafford and PLUS loans originated from 10/1/03 to 9/30/09. The legislation also increased the annual and aggregate loan limits on the unsubsidized Stafford loan for undergraduate students and allows parents to defer repayment on the Parent PLUS loan while the student is in school and for six months afterward. Congress also passed the Ensuring Continued Access to Student Loans Act Extension (P.L. 110-350) to extend ECASLA to the 2009-10 academic year.
- 2008 Congress finally reauthorized the Higher Education Act of 1965 after more than a dozen extension acts. The Higher Education Opportunity Act of 2008 (PL 110-315) added numerous new disclosure requirements including the Student Loan Sunshine Act. Other significant changes include veterans’ education benefits will no longer be treated as a resource starting in 2010-11, expands the cohort default rate from a two-year to a three-year window, establishes three new up-front loan forgiveness programs, requires education lenders to report repayment status information to all national consumer credit reporting agencies, authorizes a simplified EZ FAFSA form, requires standardization of the financial aid award letter, and softens the 90/10 rule.
- 2010 The Health Care and Education Reconciliation Act of 2010 (P.L. 111-152) was passed by the House and Senate on March 25, 2010 along party lines and signed into law by President Obama on March 30, 2010. The bill eliminates the federally-guaranteed student loan program (FFELP), with all new federal education loans made through the Direct Loan program starting July 1, 2010. The savings are redirected to the Pell Grant program, deficit reduction, improvements in income-based repayment and a variety of smaller programs. Most of the Pell Grant funding was used to backfill a funding shortfall from the American Recovery and Reinvestment Act of 2009 (stimulus bill) and to make permanent the increased maximum Pell Grant from that legislation. The rest of the Pell Grant funding indexes the maximum Pell Grant to the Consumer Price Index for five of the ten years, with the maximum Pell Grant unchanged for the remaining five years. The legislation cuts the monthly payment under income-based repayment by one third from 15% of discretionary income to 10% of discretionary income, and accelerates the loan forgiveness from 25 years to 20 years, but only for new borrowers of new loans made on or after July 1, 2014.
 New America Foundation Federal Student Loan Programs – History
 Financial Shopper Network The History of Student Loans