College students studying on the lawn on campus, 1970.

From the Archive

Federal Student Loan Plans: The Dangers Are Real

In the Spring 1970 issue of the College Board Review, two College Board executives warned readers of the consequences of pushing the financial burden of a college education completely on students

An indisputable benefit of digging through the archives of The College Board Review is being reminded that the fights we're having today about education are not only not new, they're barely different from arguments and debates waged years and decades earlier. But even with that in mind, it's bracing to open the Spring 1970 issue, find an article titled "Federal student loan plans: the dangers are real," and begin reading a piece that opens with a rhetorical multiple choice question—"Which of the following do you think are real possibilities for the near future?"—and posits one answer as "Young people will begin their careers $50,000 in debt," then sets out an argument that could have been ripped from a 2020 presidential candidate's website: "There are forces on the surface calling for massive use of loans to students to pay the mounting costs of more education for more citizens. ... We wonder if those in authority recognize the implications of what they are doing, and ask whether those implications are not contrary to the long-term national interest."

The authors, however, were not public officials. Rather, they were College Board leaders: George H. Hanford, then the College Board's executive vice president and acting president, who would serve as president from 1979–1987 and be succeeded by Donald Stewart; and James E. Nelson the vice president of the College Board. And they were troubled by rumblings they heard emanating from Washington and from their colleagues and members around the country when it came to how students and families should pay for college. They take aim at the concept of a loan bank, a kind of progenitor to Sallie Mae; the idea that market economics should dictate how young people pay for education; and what an unforgiving and punishing debt load would do to students' futures and America's cultural fabric.

The piece can get a little breathless. But it also feels entirely contemporary in its thinking and conceptualization. They correctly predict that political can-kicking and budgetary erosion on grants and scholarships will result in ever-expanding loan programs as the only resort for poor and minority students to pay for higher education. They correctly predict that students graduating with heavy debt burdens will put off marriage, home ownership, and childbirth because they simply can't afford it. They correctly predict generational animosity aimed at older people who graduated without crushing debt by those whose futures are dictated by loan repayments. And they correctly predict that colleges and universities will prioritize athletic scholarships and sports programs at the expense of other students.

Hanford and Nelson are often strident in their warnings, but more than 50 years later, with the nation staring down more than $1.7 trillion in collective student loan debt, it's tempting to think maybe they weren't strident enough. Regardless, their essay rests on a proposition that could have had transformative impacts on generations of students: "Loans should, we believe, be supplemental, designed to provide flexibility, to ease budgets, to meet emergencies, and to open opportunity. But no student who is willing to work a reasonable amount and to live modestly should have to go deeply into debt to secure an education. Heavy use of loans is an impediment to opportunity; it results in serious inequities between upper- and lower-income groups."

As the nation girds for the next skirmish in this fight, Hanford and Nelson remind us what's important: America's students, and their role in the future of our nation.

(By the way, that $50,000 debt Hanford and Nelson feared would hang around recent grads' necks, when adjusted for inflation? That would be $350,123.71 today. If that seems high, tell it to Elisha Bokman, who owes close to $500,000 in student loans.)

Two illustrations, at left, a giant Uncle Sam with an eagle at his shoulder and a crowd of people at his feet, at right two students in graduation regalia, one holds a sign reading debt free now and the other wears a sign reading just merged

This is a multiple-choice question. Which of the following do you think are real possibilities for the near future? (1) Marriages will be made in Washington instead of in heaven; (2) Young people will begin their careers $50,000 in debt; (3) Children will pay for all of their education; (4) The generation gap will be widened; (5) The aspirations of the poor will be dampened; (6) Class warfare will be fostered; (7) Nonpublic education will be undermined.

If you think that any or all of these options are preposterous, we ask you to reconsider. We believe that there are tides running in our nation's capital that could inadvertently bring about each one of these possibilities. There are forces on the surface calling for massive use of loans to students to pay the mounting costs of more education for more citizens. These forces (implicit in proposals to shift the burden of payment for higher education on to students, and away from parents and the public) could well be masking the dangerous undertow implicit in those not so preposterous options. We wonder if those in authority recognize the implications of what they are doing, and ask whether those implications are not contrary to the long-term national interest.

We stress the inadvertence and the possibility of undertow because we do not believe in the existence of some conscious, ill-intentioned plot, but in the proposition that these issues (and other more basic ones) have unwittingly been either totally ignored or not adequately confronted by the right people. As one colleague has written us, "While my experience is limited, I find that even those who should know better do not understand the philosophical or the pragmatic considerations involved in over-reliance on loans. I find this problem with the United States Office of Education in some key places, among key state officials such as governors and legislators, among most college and university presidents, and even among a few student financial aid officers who ought to know better! The potential consequences of the trend are tragic."

This tide we speak of started running in the 1950s. During this decade the increasing demand for college education and its costs began to outrun both family funds and scholarship resources. Economists, chief among them Harvard's Seymour Harris, came to the rescue with the observations that ours is a credit economy, that education is an economic resource, that college graduates make more money than noncollege-educated people, and that therefore loans to pay for college educations are good investments not only for the individuals but for the nation. "Pay today's high costs of education with tomorrow's cheap dollars," they advised the students. "Reuse your dollars; use loans not grants," they exhorted the colleges. "Stimulate the credit economy," they counseled the lawmakers in Washington.

Does it still make sense?

This philosophy (which may have made sense in the 1950s) is still being propounded in the 1970s. What troubles us is that times have changed, and no one seems to be asking if yesterday's theory makes sense in today's world. We believe that there is reason to doubt that it does.

When Professor Harris was promoting loans, the nation was in the final stages of opening up higher education in the middle-income classes. Well less than half of all high school graduates were going on to college, and a college education did indeed generally hold the promise of a higher-paying job. But in the 1960s the nation turned the corner and began to give meaning to the call of the Truman and Eisenhower commissions of more than a decade before for universal opportunity for postsecondary study. We began seriously to recruit students from what in earlier times we would have called the "lower classes," but which we later learned to call first the "underprivileged," then the "disadvantaged," and now the "minority/poverty" communities.

Cover of the spring 1970 issue of the College Board Review

But as more and more students benefit from higher education and as more of the labor force becomes college-educated, will not the opportunities for differential financial "payoff" tend to diminish proportionately? Will it make any real difference that a college graduate earns more than a noncollege-educated worker when there aren't very many of the latter? Our answers are implicit in the way we have worded the questions. We think that times may have changed sufficiently in the last 15 years to invalidate one of the basic theories on which the loan movement was founded.

Meanwhile, however, today's disciples of loans are advocating that the financing of higher education be transferred to the "marketplace." Because the recipients of higher education get most of the benefits, they should be expected to pay most of the costs, their arguments imply. We wonder if this reasoning tends to ignore the benefits that society gains from an educated people, to forget the fact that greater future tax revenues will accrue from those who do increase their earning capacity, and to overlook the thousands of individuals whose education will pay off in service to society rather than in personal dollar rewards. Undaunted, the loan advocates feed, or feed on, the pressure to reduce society's support for higher education, at both state and federal levels. They seek to cut this support by pricing higher education at its full cost, and then requiring most students to borrow substantial sums for their educations and spend a large part of their working lives paying the money back.

What it all costs

We believe that, as the later proponents of progressive education unwittingly did violence to Dewey, so today's latter-day disciples of loans may inadvertently be carrying Harris' philosophy to extremes in their search for ways to foot the higher education bill.

That bill can be divided into three parts: (1) the student's time away from earning a living; (2) his college-related expenses for books, supplies, transportation, and so forth; and (3) the institutions' operating costs. By far the largest of the three is the first, for not only are students foregoing substantial employment income, but society is also doing without their productive powers. Together with the dollars needed for college-related expenses, they constitute about two-thirds of the total cost. When tuition and fees to cover some (but not all, the fundraisers are quick to point out) of the institutions' operating costs are added to the other student expenses, it turns out that the student and his family have been carrying about three-fourths of the total—a not inconsiderable burden.

To meet increasing college costs students, parents, and colleges have increasingly been turning to the federal government. In turn, the government's options at any given time are a function of the relative priorities given to improving equality of opportunity on the one hand and to increasing the per-student subsidy on the other. Even with priority given to the former, however, the basic question remains: How large should the public subsidy be and how should it be paid to insure that all students with ability are able to go to college?

Today the most serious obstacles to increased federal aid in the form of grants are the budgetary and fiscal priorities of the present administration and the attitude of many members of Congress. There are also real doubts about the effectiveness of scholarships generally and grant aid to minority/poverty students in particular. And there is the unfavorable climate created by student unrest. For these and other reasons, then, most policymakers have been willing (and even eager) to turn to expanded loan programs as the chief means of financing higher education.

The loan bank concept

Many have turned to the loan bank concept, first given wide publicity by J. R. Zacharias in a panel report (Panel on Educational Innovation, and The Educational Opportunity Bank, U.S. Government Printing Office, 1967). Simply stated, it calls for the creation of a completely private bank which would raise money in the regular market on the security of the repayment contracts it would make with borrowers. The essential premise of the plan would have repayment expressed either as some percentage of income or as a rising schedule of repayments extended over 30 to 40 years, instead of as a fixed dollar amount.

Advocates claim that a massive loan program would increase college attendance among low-income students and expand their educational choices; help keep private colleges and universities in business by enabling them to raise tuition (thus tapping the loan resources made available to students and perhaps reducing the price gap with public colleges, which would also raise their tuition); and make young people more financially responsible for their own education. But we have doubts about this utopian view.

We wonder whether loans are a more effective means of equalizing educational opportunity than direct institutional support and whether loans are more effective than other ways of aiding students. It is true of course that most of the current loan bank plans—though not the original Zacharias plan—propose to supplement existing student aid programs and, in fact, call for large-scale scholarship and aid programs for all low-income students. However, with the present lack of political support in the administration or Congress for grant aid programs, it is not difficult to imagine that, as a massive loan program takes hold, other direct aids in the form of grants or scholarships could easily be reduced or eliminated in future years. A future administration or Congress, hard pressed financially, might be greatly tempted to expand loans and cut back other student aid funds, leaving the poor and minority students with borrowing as their only way to pay for college.

Two illustrations, at left an old man in graduation regalia smiling as he pops out of a piggy bank that reads Loan Bank and clutching money; at right, student in graduation regalia handed a diploma and loan bill

The low-income student

Take the students from low-income families. They need all the financial help they can get to attend college. As more and more of that help is offered in the form of loans, will a massive debt seem so formidable that there will be fewer, not more minority and low-income students aspiring to undertake a college education? Psychologists and sociologists, not economists, are needed to deal professionally with this question. But even amateurs like ourselves recognize that a debt, particularly with nothing tangible to show for it like a car or a house or a pair of shoes, can be anathema to someone for whom money has always been scarce. Therefore we ask, "Couldn't the increasing use of loans hamper rather than help in the achievement of our national goal: equality of educational opportunity?" And we reply, "We think so. Let's take a hard look."

Take a hard look, for instance, at the effects on groups of students from different ethnic and socioeconomic backgrounds. John Mallan has, at least in terms of the loan bank proposal. Taking as a given that tuition and other charges will rise as more student aid, whatever the form, becomes available, he has written in a background paper prepared for the American College Testing Program's February 21, 1970, conference on financing higher education, "If the loan bank became a law, it could conceivably lead to a sort of class war of the poor against the near-poor or lower middle class, and to some extent of Whites against Blacks. The recommendation of the Carnegie and Rivlin reports is that students from the lowest quartile of family income would receive the most substantial aid, and probably would not have to go into debt. Those in the second quartile would receive somewhat less support, probably on a sliding scale so that there would be no aid as the student's family income approached the national median.

"Thus, most students now in college, including many from lower-middle and middle-income families struggling to pay their way, would receive no benefits, be forced to pay higher tuition, and have to go heavily in debt. . . . [Under] this crude conspiracy theory ... the effect of the loan bank, especially if combined with scholarships for the poor (as called for in the Carnegie and Rivlin reports), would be that ... the wealthy could pay for college and leave with little debt; the poor would go free; but the lower middle classes would suffer from the triple burden of no scholarship aid, much higher tuition, and what could be large long-term debts." We believe that Mr. Mallan may have a point worth pursuing.

Or take any student who needs financial help. As more and more need for it creates an ever larger debt for him, will the length of his education or his choice of career be affected? But that is another question for the psychologist or the average citizen, not for the economist. We believe that individuals view their financial obligations differently, that there are some who are less willing to risk than others, and that they will stop their educations unless they can see themselves relatively free of debt at the end of their desired road. For example, do we want our graduate and professional schools populated chiefly with those who are able and willing to pay, and with others who are willing to take a financial risk? Don't we want some financially conservative businessmen, lawyers, and engineers who have made it up from low-income backgrounds? And speaking of careers, will there be changes in college courses of study? Will some students (in the light of probable debt obligations) tend to shy away from majors where the economic potential is smaller? We think there is a danger on both counts and invite scrutiny of it before we plunge the next generation too deeply into debt.

Choice of college

Take the student's choice of college. Will it be affected? We think so, particularly when he or she contemplates the possibility of a private or independent college. The academic community finds itself with mixed feelings on this score, as costs of operation continue to rise. Some see loans as a mechanism for pumping more dollars into their shrinking coffers. Others like ourselves worry that the differential in the size of the debt that would have to be assumed to attend a privately-supported institution (as contrasted with one publicly supported) would tend to scare off from the former all but the most affluent and those few who qualified for outright scholarship help. We believe that massive reliance on loans might thus further undermine the waning strength of the private sector of higher education. These questions also deserve close scrutiny by representatives of the people served by those institutions.

Or take the students who are scared off from going to college at all by the prospect of indebtedness. The incidence of fright is a function of the size of the debt. If more loans do indeed mean higher tuitions, will not the prospect of even larger debt scare off even more students than is now the case? Barbara Newell recognizes that possibility, and writing in the winter 1970 issue of the Educational Record, suggests an ingenious plan for enticing even the most timid into the groves of academe. She proposes a tuition-free freshman year, with the foregone income recovered through higher tuitions in the later years paid by those who find they can succeed and so presumably reap the rewards of Professor Harris' greater, later earning power. The practicality of double tuition for the second year of a two-year college aside, is it quite right to think of increasing the debt of those who succeed in order to underwrite the education of those who fail? In the final analysis, the same overall debt would have to be assumed, but by fewer people.

Athletes score

Or take the other extreme, the students who can confidently expect the biggest pay-off the soonest—the athletes. If Professor Harris is still right, then they most of all should be prepared to assume a sizable debt, for they will be able to retire their loans sooner than others. Is the nation enlightened enough to put this kind of squeeze on their idols? We doubt it. Instead, as the use of loans grows, tuitions and hence the size of athletic scholarships will rise, admissions charges to sports events will increase, and the public will gladly pay the price for someone else's son to go to college—but not their own.

Two illustrations, at left a basketball player dunking a bag of money; at right a student running from a debt bill

Loans and marriages

Take any two students, male and female. What will the impact of debts be on marriage choices? Imagine this personal notice in your local newspaper. "Young man facing $10,000 debt at the end of graduate school seeks romance with compatible young lady with similar obligations. Object: matrimony, mortgage, and two car loans; no children pending debt reductions." Before you know it, they could be starting life together $50,000 in debt. The authors believe, incidentally, that a good case can be made for birth control but that the foregoing is not the way to go about promoting it. More likely, we think is this ad: "Debt-ridden male graduate seeks to meet debt-free female. Object: merger." This is the marriage made in Washington.

A negative dowry

Or take just the young woman. Could it be that increasing reliance on loans for student financial aid would slowly undermine the educational and career aspirations of women? We think so, and not just for the reasons implicit in the foregoing paragraph. She will, of course, think twice about the effects of her negative dowry on her marital prospects. But she will be conscious too of the fact that our society is still a long way from according women equal rights, including equal pay, in the world of work. And as a result the length of her education and her choice of career will be even more affected than those of her male counterpart by the prospect of debt.

Take a family. Could there be a change in parent-child relationships as a result of reliance on student loans? Until the 1950s it was traditional that the parents paid for their child's education—all of it. Now we are asking the child, the student, to assume more and more of the burden through loans that will be repaid out of his future earnings. We don't see how the relationship can help but be affected. We don't presume to know just how but we invite the speculation of others, particularly those who today are championing the loan concept. And, while Junior is paying for college, why not have him pay the cost of his high school—or even grammar school—education? After all, an adult with some education is going to earn more than someone with none. And it would really reduce taxes, as well as complicate school board meetings!

Generations apart

Or take parents and students, each collectively as a generation. One of the tides that is running in Washington is the effort to ease the tax burden on the citizen. Reliance on student loans is overtly recognized as one means of achieving this goal. Parents (as today's taxpayers) collectively applaud the effort. But what about the students, tomorrow's taxpayers? What will they think about their parents' generation when they realize what is being proposed, and come to realize that (in one sense) a whole generation is getting out of paying for anybody's college education—its own and its children's, except perhaps for the athletes'? Exaggeration for effect? Of course, but the seeds of truth therein could produce some new grapes of wrath. If we've got a generation gap now, think how wide it will become when the students catch on to what is up!

Or take the students, collectively but alone. John Mallan, again, has. He writes, "In this age of concern about student attitudes, it is surprising that no one has apparently sought out student reactions to a plan which would require them to pay much higher tuitions and take on substantial debts after graduation. Some loan bank supporters, to be sure, have suggested that the bank would be a way to enhance 'student power' or 'consumer sovereignty,' giving students the funds to attend the college they wish, perhaps to force changes in a given college, even to found new institutions. The hitch, of course, is that students would have to assume large debts in order to do so. Many of them, certainly the more militant and activist radicals and Blacks, have been saying in ever-stronger language that they believe American society should reorder its priorities and provide more resources for higher education, not less. Moderate students would be more enthusiastic about a plan which forced them to accept higher tuitions and larger debts—if the alternative of lower tuition and additional student aid were available."

Loan plans not studied

Taken together or separately, most students, parents, and colleges are willing to recognize loans as part of student assistance. Yet the potential of excessive reliance on loans is deeply disturbing for the social and political reasons implicit in the questions just recited. No nation in history has ever before achieved the level of education made possible by our local, state, federal, and private investment. Much of this nation's unmatched level of productivity and well-being can largely be attributed to the result of this investment. Ironically, no other nation has given serious thought to reducing their public investments in higher education in the face of increasing demand. And yet the loan bank plan has never been fully or seriously debated and discussed. The reports and articles published so far leave most questions unanswered—not just the sociopolitical ones recited above but other equally important economic and political ones, such as the actual cost, the probable debt which students would have to accept, the likely magnitude of tuition increases at most colleges, and the mechanics of establishing a bank. More specifically in economic terms: To what extent would a loan bank actually be self-supporting? Since no very specific plan has ever been developed and no estimate made of the levels of initial capitalization or annual federal subsidies that would be required, how can we know what the annual cost to the federal government might be? Could not the bank prove to be an inflationary force? Might it not, through heavy borrowing by students to meet increases in tuition and other college costs, put a heavy strain on an already tight money market?

Two illustrations, at left a man crouched as bundles labeled loan debt, no scholarship, higher tuition are loaded on his back and two men look on; at left, an old man being handed a clock by a grinning younger man as the old man thinks about his tuition bill

Political implications

Or in more political terms: What should he the relationship of the bank to the federal government—and to colleges and students? How should it be organized and where would it obtain initial funds? What control should the government have over its interest rate policies and other terms of its loans? Would interest rates be subsidized or regulated by the government? What would be the loan bank's possible relationship to federal economic and fiscal policies? Would it be the subject of annual congressional battles over its basic charter, and would efforts he made to repeal or change it? Would there he annual efforts to decrease or increase appropriations to the bank in order to affect its interest rates? Would it be the subject of forgiveness amendments like other student aid programs—provisions that loans to school teachers, social workers, veterans, and others be cancelled? Would it not become embroiled in controversies over whether loans should go to student radicals and others involved in creating campus unrest? Or what about efforts to require loyalty oaths, selective service implications, or loans to students at colleges which refuse to abide by civil rights legislation? In short, won't a loan program that has as its debtors many—if not most—of the nation's college graduates be a continuing center of political, economic, and educational controversy?

Unanswered questions

If our message is not yet clear, it is this: There are too many unanswered questions about an increased reliance on loans to students for the nation to be led blithely and inadvertently down the loan bank path. In the debate over what kind of loan program should he adopted, the more fundamental question as to whether we should rely more heavily on loans goes forgotten and unanswered. As another colleague, in Washington, has written, "The larger issue, namely that of the place of student credit, the characteristics of student credit, and the goal of student credit in determining who pays what for college and when" is obscured by "the clutter of every conceivable type of loan program which seems to be surrounding us all."

If our own beliefs are still not clear, they can be summarized as follows: Loans should, we believe, be supplemental, designed to provide flexibility, to ease budgets, to meet emergencies, and to open opportunity. But no student who is willing to work a reasonable amount and to live modestly should have to go deeply into debt to secure an education. Heavy use of loans is an impediment to opportunity; it results in serious inequities between upper- and lower-income groups.

Little adequate data

Any discussion of the major problems facing student loan financing in higher education will be as limited as ours has been by a lack of adequate data. Again, as our Washington correspondent puts it, "From my own vantage point, I fear there is much debate on programs of major proportions with too little evidence, too much fallacious reasoning and a general glossing over of very many tough and as yet unanswered questions." These gaps in our information make proposals for changing all but the most obvious flaws in the present system a risky proposition. People on all sides of the student loan question could certainly be well served by better information. After all, it could be that some loan bank advocates are simply engaging in delayed-action rhetoric in order to lend respectability to the notion that it is neither necessary nor desirable to expand federal aid to students.

No program for encouraging enrollments or expenditures in higher education will have predictable consequences until we are able to relate enrollments and expenditures to each form of financial aid (loans, grant, work opportunity), to the conditions of such aid, to prices, and to income (family, future, and opportunity) of college students.

We are concerned that there has been so little opportunity for higher education—meaning students and colleges—to make their interests in the credit approach to paying for education known. It seems imperative to us that the subject be fully aired before it becomes an accomplished fact. It may be possible to conduct controlled experiments and research to find some of the answers. At the very least, a number of informed and interested leaders in the fields of education, sociology, psychology, economics, and political science should attempt to pool their wisdom in response to the plan.

We prefer marriages made in heaven, and it is getting late.