Loans and Federal Aid

• Early Institutional Aid
• Student Aid and the Cold War
• Universal Aid
• Loans and Limits

The costs associated with obtaining higher education make financial aid a necessity for many students. While now best known for its student loan programs, the federal government has offered various forms of aid to higher education throughout its history. This entry traces the history of federal financial assistance to higher education from the early use of land grants to promote the establishment of postsecondary institutions to the extensive loan programs implemented in the late 20th and early 21st centuries.

Early Institutional Aid

Early on, the federal government expressed only minute interest in higher education. Prior to the adoption of the U.S. Constitution, the Northwest Ordinance of 1787 supplied land grants to fund the establishment of a university in the territory that became the State of Ohio in 1803. Even so, the federal government did not return to the issue until near the middle of the 19th century. During the Civil War, Congress passed the Morrill Act of 1862, which helped promote two government initiatives. On the one hand, the sale of land grants of unoccupied territory in the West helped encourage settlement as homesteaders purchased and took up residence on the unused land. At the same time, the revenues from the sale of the lands went to support postsecondary schooling by funding institutions and promoting curricular offerings in agricultural and mechanical arts.
In 1890, Congress enacted the Second Morrill Act, which provided direct federal financial appropriations to support agriculture and mechanical curricula. Also known as the Agricultural College Act of 1890, the Second Morrill Act allowed racial segregation to continue in higher education by requiring states either to admit freed slaves to existing land grant institutions or to establish new postsecondary schools to provide these citizens with agricultural and other training.
Established between the passage of the First and Second Morrill Acts, the Hatch Act of 1887 also helped the federal government to promote the cause of agriculture. The Hatch Act provided the first source of direct federal funding to higher education for agricultural experimentation, research in agricultural science, and the establishment of agriculture stations to export agricultural research and curricula to the farmers throughout participating states. Under the Smith-Lever Act of 1914, the agricultural stations created in the Hatch Act became the cooperative extension system within the land grant institutions.

Student Aid and the Cold War

Despite agricultural support, direct student aid did not receive attention from Congress until well into the 20th century. Commonly known as the G. I. Bill, the Servicemen’s Readjustment Act of 1944 is the earliest example of federal direct student aid. Under this act, World War II veterans received both stipends and tuition assistance because of their service to the country. Designed to prevent a postwar economic decline, the funds provided an incentive for veterans to delay entering the labor market while also making it easier for them to attend college.
Continuing to focus on national security, the National Defense of Education Act (NDEA, 1958) provided both institutional and student aid to higher education. To institutions, the NDEA offered financial support for academic priorities in science, mathematics, and foreign languages useful in the cold war effort. Further, the NDEA made funds available to provide students with graduate fellowships to pursue degrees in the areas identified as high need. Additionally, the NDEA created the National Defense Student Loan (NDSL), a low-interest loan program for qualified students in areas highlighted by the act. Congress renamed the NDSL as the Federal Perkins Loan under the 1986 reauthorization of the Higher Education Act.
Aid, Expansion, and Social Equity In the 1960s, federal education legislation shifted attention to social equity issues. Part of President Lyndon B. Johnson’s “Great Society,” the Economic Opportunity Act of 1964 (EOA) generated a range of new programs focused on helping children and families burdened by poverty. Three of these programs had direct relationship to higher education: Upward Bound, VISTA, and College Work-Study.
Now part of the federal government’s TRIO Programs, Upward Bound helps to prepare lowincome students to transition to and succeed in postsecondary schools. Volunteers in Service to America, or VISTA, focuses on training volunteers to serve impoverished communities by working with local government agencies or nonprofit organizations.
Developed in 1993, the AmeriCorps Program is a more recent rendition of VISTA that focuses on service to public schools. In fact, AmeriCorps survived a challenge alleging that it violated the Establishment Clause, because some participants taught religion along with secular subjects in religious schools. The circuit court for the District of Columbia ruled that AmeriCorps was constitutional, because as a governmental program that was neutral with regard to religion, it offered assistance directly to individuals who independently chose to use the aid in religious schools (American Jewish Congress v. Corporation for National and Community Service, 2005, 2006).
The College Work-Study Program provides part-time employment for students during their enrollment to help them earn money while pursuing an education. Now known as the Federal Work-Study Program, this program continues to support student employment at approximately 3,400 participating institutions at levels equal to or higher than the federal minimum wage.
A year after the EOA was enacted, President Johnson further advanced his Great Society with the passage of the Higher Education Act of 1965, which included several new and consolidated federal provisions related to financial aid. Building on previous legislation, the Higher Education Act (HEA) created the Guaranteed Student Loan (GSL) Program. The act also expanded federal aid offerings with the Educational Opportunity Grant (EOG) Program, which targeted students with high established financial need. Moreover, the EOG is earliest form of gift aid that the federal government provided to students. Unlike other forms of aid, the EOG did not require repayment or previous government service, and it did not have curricular restrictions. Rather, the EOG Program distributed funds to institutions, which could then award the aid to eligible students. In 1972, the Educational Opportunity Grant Program became the Supplemental Educational Opportunity Grant (SEOG) Program. That same year, the federal government created the Basic Educational Opportunity Grant (BEOG) Program. While the SEOG allocates financial aid to institutions, the BEOG awards funds to students who can use the money to attend an appropriate institution of their own choice. Called the Pell Grant since 1980, the BEOG Program offers a maximum award value as set by Congress based on calculated level of student financial need.
Stemming from the Great Society, 1960s legislation helped to expand access to higher education by offering new types of aid to categories of students who received little consideration under previous acts. While the G. I. Bill and the NDEA focused on financial aid to support national priorities, the higher education legislation of the 1960s and early 1970s centered on getting students into postsecondary schools to help address domestic concerns.

Universal Aid

In contrast to the 1960s, legislation of the late 1970s and 1980s shifted to a broader population. Beginning with the 1976 reauthorization of the HEA, the federal government began to both increase the categories of students eligible for aid and add more conditions on students in order to become and remain eligible to receive financial support. Most notably, the 1976 reauthorization added the condition that students make satisfactory academic progress to continue to receive federal financial aid.
Following the 1976 reauthorization legislation, Congress made additional steps toward offering universal financial aid for all college students. In 1978, Congress passed the Middle Income Student Assistance Act (MISAA), which removed the income eligibility requirements from the GSL Program. Renamed the Stafford Loan in 1988, the GSL became the first form of federal aid that was truly available to all college students regardless of family income. Additionally, the MISAA also expanded the eligibility guidelines for the Pell Grant, giving access to more students.
Building on the MISAA, the 1980 and 1986 reauthorizations of the HEA provided the foundation for the development of more aid with fewer eligibility restrictions. In the 1980 reauthorization, Congress created the Parent Loan for Undergraduate Students (PLUS), which gave parents the opportunity to borrow money to cover college costs. Later, the 1986 reauthorization refined the PLUS program by restricting it to parents, thus removing the need to consider a student’s ability to repay these loans. In addition, the 1986 reauthorization established the Supplemental Loan to Students (SLS) for graduate, professional, and independent students, thus providing additional resources to these students.
The universal aid movement of the late 1970s and 1980s gave more students access to more money. With each of these loans, the federal government offered student and parent borrowers more ways to finance an education. Likewise, the different interest rates and policies attached to these loan programs placed new burdens on borrowers. Unlike previous loan programs, some loans created during this period accumulated interest while students remained enrolled in higher education. The PLUS program both charges interest and requires repayment while students are still attending postsecondary school.

Loans and Limits

Since the 1980s, loans have been the dominant form of federal financial aid available to postsecondary students at all levels. In order to further entrench loans into the financial aid landscape, the federal government devised the Federal Family Education Loan (FFEL) Program in 1986. The FFEL Program included all existing federal loans and sought to make it easier for students and parents to repay education loans by putting them all together. Yet, the creation of a consolidation program illustrated how loan-driven federal aid had become. Other changes in the 1990s and 2000s further demonstrate the federal government’s desire to limit and control its investment in higher education.
In the 1992 reauthorization of the HEA, Congress streamlined the financial aid process by creating the Free Application for Federal Student Aid (FAFSA). With the FAFSA, Congress created one form for all students to use when applying for federal aid. That same year, the federal government made additional changes to the student loan programs in an effort to reduce the nationwide default rate. These changes included extending the grace period to 270 days for students to begin repayment after leaving college, deeming institutions ineligible to distribute federal aid if 25% of their graduates default over a three-year period or 40% default in a single year, and reducing the interest rates to make repayment easier.
Continuing to focus on loans, the Student Loan Reform Act of 1993 increased the federal government’s involvement in the programs by having the government take on the role of direct lender. At the same time, this act created the income-contingent repayment option. Later, in 1997, the federal government passed the Taxpayer Relief Act, which provides a range of relief measures related to college costs, including making interest paid on student loans tax deductible. The following year, the 1998 HEA reauthorization created loan cancellation for teachers, made students with drug conviction ineligible to receive federal aid, and authorized FAFSA verification with federal tax records to eliminate Fraud in aid applications. More recently, the College Cost Reduction and Access Act (2007) cut payments to student loan lenders, increased the maximum Pell Grant award, and established loan forgiveness opportunities for graduates in a range of public service employment. Clearly, student loans will continue to be the primary form of federal aid available to students and their families for many years to come.

See also Morrill Acts
Further Readings
Baum, S. (2007). It’s time for serious reform to the student-aid system. Change, 39(2), 15–20.
Beaver, W. (2008). The student loan scandal. Society, 45(3), 216–221.
Flint, T. A. (1997). Predicting student loan defaults. The Journal of Higher Education, 68(3), 322–354.
Perna, L. (2008). Understanding high school students’ willingness to borrow to pay college prices. Research in Higher Education, 49(7), 589–606.
Schrag, P. G. (2007). Federal student loan repayment assistance for public interest lawyers and other employees of governments and nonprofit organizations. Hofstra Law Review, 36, 27–63.
Legal Citations
Agricultural College Act of 1890 (Second Morrill Act), ch. 841, § 4, 26 Stat. 419 (1890).
American Jewish Congress v. Corporation for National and Community Service, 399 F.3d 351 (D.C. Cir. 2005), cert. denied, 546 U.S. 1130 (2006).
College Cost Reduction and Access Act of 2007, Pub. L. No. 110-84, 121 Stat. 784 (2007).
Economic Opportunity Act of 1964, Pub. L. No. 88-452, 78 Stat. 508 (1964).
Hatch Act of 1887, 7 U.S.C. §§ 361a et seq.
Higher Education Act of 1965, Pub. L. No. 110-315 (2008).
Middle Income Student Assistance Act, Pub. L. No. 95-561 (1978).
Morrill Act of 1862, ch. 130, § 1, 12 Stat. 503 (1862).
National Defense of Education Act of 1958, Pub. L. No. 85-864, Title I, § 101, 72 Stat. 1581 (1958).
Servicemen’s Readjustment Act of 1944 (G. I. Bill), ch. 268, 58 Stat. 284 (1944).
Smith-Hughes National Vocational Education Act of 1917, ch. 114, 39 Stat. 929 (1917).
Smith-Lever Act, 7 U.S.C. §§ 341 et seq. (1914).
Taxpayer Relief Act of 1997, Pub. L. No. 105-34 (1997).