History of Education Debt

Student loan debt surpassed $1.7 trillion as of Oct. 2022. This is close to 10% of the U.S. gross domestic product. How did we get here, and what options do families have for financing higher education?

Today, high school students are typically expected to continue their education and go to college. Graduates with a college degree on average will earn 80% more than those with only a high school diploma. However, receiving a college degree wasn’t always a necessity in our country.

Prior to 1940, attending college or university was reserved for a few, wealthy, mostly white men and those who wanted to pursue a religious education. In 1919, approximately 600,000 students were enrolled in college. This number has ballooned to 20 million today.

The federal government took three key actions that paved the way for college education to become more accessible:

1. GI Bill:

In 1944, the GI Bill was passed, which allowed veterans to attend college at no expense. GI Bill benefits have since changed.

2. National Defense Education Act (NDEA):

After the Soviets launched Sputnik in the fall of 1957, the U.S. feared technological advancements in our country were not keeping up during the Cold War. This fear led President Eisenhower to sign the NDEA in 1958. The NDEA expanded the role of federal government in higher education in the name of national security. The act provided scholarships and low-cost loans to students in the areas of math, science, engineering and foreign language. It also provided grants to states for improvements to high school education. In 1964, the NDEA was amended to expand federal assistance to fields of study beyond the few included in its initial passing in 1958. College enrollment more than doubled from 3.6 million in 1960 to 7.5 million in 1970. Many say the accessibility of higher education provided by the NDEA was the driving factor.

3. Higher Education Act (HEA):

President Johnson signed the HEA on Nov. 8, 1965, as part of his efforts to address rising poverty levels in the United States. As a result of the HEA, attending college became a reality for more young people growing up in lower- to middle-income households. The HEA created more financial assistance for higher education costs. College enrollment grew while education costs were affordable (by average standards).

This trajectory shifted in the 1980s with President Reagan’s focus on budget cuts. Student aid programs were significantly reduced from 1980-1985. Widespread availability of low-cost, low-interest loans was limited and made available only to families with incomes below $32,000. The federal government shifted from primarily providing aid to primarily providing debt financing for higher education. States also began cutting funding for public colleges and universities with the tax and expenditure limitations passed during the 1980s.

States continued to cut spending on public higher education institutions, resulting in today’s level of support nearly $9 billion below pre-Great Recession (2008-2009) levels. As a result, public college and university tuitions have increased to levels not affordable for many, leaving years of savings or loans as the only options to finance a college education.

Now, let’s look at these options:

Section 529 of the Internal Revenue Code was part of the Taxpayer Relief Act passed in 1997 during the Clinton administration. Legislation passed in 2001 and afterward made the federal tax benefits of 529 plans permanent. Contributions to a 529 plan are made on an after-tax basis, but all earnings grow tax-free if used for qualified education expenses (those that are required for attendance). States operate their own 529 plans. Some states offer a state tax deduction for residents. Each plan offers a menu of investment options. Most offer age-based plans, which automatically rebalance accounts with age — they are more aggressively invested in a child’s early years and then become more conservative as the child nears college age. Savings in 529 plans reached over $350 billion by mid-2019 according to the College Savings Plan Network.

Now on to financial aid and loans as the other main option for financing higher education. All high school graduates who aspire to continue to postsecondary education should complete the Free Application for Federal Student Aid (FAFSA) form, which will determine the level of aid available. Aid is determined by a formula:

Cost of Attendance – Expected Family Contribution = Financial Need

Each state has its own deadline for the FAFSA, and aid can come in the form of grants, scholarships or work-study programs. Each school combines all available aid into a package for students needing assistance. If aid is not enough to cover costs, a loan may have to fill the gap in funding.

The Department of Education offers four types of student loans: Direct Subsidized, Direct Unsubsidized, Direct PLUS and Direct Consolidation. Each of these loans varies in their terms, amounts and accessibility, the details of which are beyond the scope of this article. When considering student loans to pay for postsecondary education, the key is to understand the education’s return on investment and to balance the underlying debt that is financing this investment.

The rising cost of higher education over the past few decades, coupled with cuts in both federal and state aid, has made education planning of utmost importance. Starting early is key. Parsec’s comprehensive approach to wealth management includes education planning. We recommend that clients with young children create an education plan with their advisor that can be revisited annually in the years leading up to college.

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Betsy Cunagin, CFP®, CRPC®


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