Page 1 of 12
Advances in Social Sciences Research Journal – Vol. 10, No. 4
Publication Date: April 25, 2023
DOI:10.14738/assrj.104.14404.
Mbah, R. E. (2023). Financing American Higher Education: Reviewing the Trend in Student’s Perceptions of Their Student Debt.
Advances in Social Sciences Research Journal, 10(4). 99-110.
Services for Science and Education – United Kingdom
Financing American Higher Education: Reviewing the Trend in
Student’s Perceptions of Their Student Debt
Ruth Endam Mbah
https://orcid.org/0000-0002-8839-9196
Department of Business and Economics,
Bethany College, Lindsborg, KS, USA
ABSTRACT
This paper reviews existing pieces of literature on student debt, specifically
perceptions of student debt and debt repayment strategies in the USA. The policy
decision to shift from need-based grants as a means of financing college education
to student loans in the 1990s changed the trajectory of higher education, especially
for low-income families. Most American college students now have to rely
significantly on student loan debt to finance higher education, especially among
those who see these loans as an investment. While in school, most college students
seem to be unrealistically optimistic about paying their debt upon graduation,
which may be an explanation for the huge debt delinquency rate we record in the
US. Many graduate colleges today with an unbearable outstanding amount of
student loan debt. This explains the consistent correlation between student debt
and financial anxiety or stress reported in most studies as student debt and credit
card debt have become a significant part of the American college student. There is,
therefore, a need for the incorporation of accurate financial literacy programs in
our curriculums starting from high school.
Keywords: Student Loan Debt, Student Perception, Pell Grant, Well-Being, Student debt
Stress, Financial Literacy, Higher Education Cost
INTRODUCTION
Policy decisions over higher education in the 1990s led to a crucial turning point in higher
education financing. This is because the focus shifted from financing higher education via need- based grants to a heavy provision of student loans for low-income college students (Paulsen &
St. John, 2002; Mbah, Forcha, & Mende, 2020; Mbah, 2021a). Protopsaltis and Parrott (2020)
postulate that “despite the evidence that Pell lowers the net price of tuition for low- and
moderate-income students and raises enrollment, persistence, and completion rates, Pell
Grants now cover a shrinking share of college costs.” The rising cost of higher education is
causing many Americans, especially low-income families to tilt toward loans to finance higher
education (Mbah, 2021a). The rise in tuition is surpassing the ability of students to pay and the
amount that students have to borrow to cover higher education has risen “from roughly half
(49%) to over two-thirds (69%) from 1993 to 2012, according to the Pew Research Center.
Between 1993 and 2020, the average loan amount grew nearly three-fold, surpassing $30,000”
(Perry et al., 2022).
Page 2 of 12
100
Advances in Social Sciences Research Journal (ASSRJ) Vol. 10, Issue 4, April-2023
Services for Science and Education – United Kingdom
As of January 2021, about $44.7 million Americans had student loan debts with over $1.71
trillion in total US student loan debt. About 69% of college students in the class of 2019
graduated with an average of $29,900 in both private and federal debt (Education data, 2021).
The rising student loan debt is negatively impacting graduates' entry into the workforce and
may even affect student career choices (Ulbrich & Kirk, 2017). Student loans are a huge burden
on the shoulders of many Americans, a direct result of the skyrocketing cost of higher education
in the past decade (Perry & Spencer, 2018; Mbah, Forcha, & Mende, 2020). An article from the
Mises Institute shows that ‘at more than 1,000 colleges and trade schools, or about a quarter of
the total, at least half the students had defaulted or failed to pay down at least $1 on their debt
within seven years (McMaken, 2017). Current research tilts to the fact that a majority of this
student loan default comes from Black American college graduates who are more likely to delay
repayment than their white counterparts (Scott-Clayton 2018; Federal Reserve Board, 2017).
According to Bartholomae et al. (2017), students’ perceptions of their student loans as an
investment in education influence their willingness to repay such loans. Such perceptions
equally influence students’ prioritization of student loan debt repayment among various debts
as suggested by Pinto and Mansfield (2006). The purpose of this student is to review trends in
student loan perceptions and student loan repayment. This review will help policymakers and
school officials propose educational policies that will ameliorate and ease student loan
repayments.
BRIEF HISTORICAL PERSPECTIVE OF THE STUDENT LOAN DEBT PROBLEM
The concept of student loans is not new in higher education but can be traced back to 1838
when the first no-interest student loan was presented to Harvard University students (Harvard
Loan Program) even before the creation of the U.S. Department of Education (Fuller, 2014). On
March 2, 1867, the U.S. Department of Education was created through legislation enforced by
President Andrew Johnson to ensure the collection of educational statistics across the U.S. and
to facilitate the success of educational institutions (AllGov, 2016). However, at its creation, the
U.S. Department of Education had no student loan program. The Servicemen's Readjustment
Act also called the “GI Bill,” of 1944 signed by President Franklin D. Roosevelt permitted
veterans of WWII to get postsecondary education for little or nothing (Gitlen, 2016). The
foremost federal investment in the low-interest student loan program (National Defense
Student Loan) was formed in 1958 by the National Defense Education Act (NDEA). Its purpose
was to enhance education, science, engineering, mathematics, and foreign language programs
during the Cold War. The National Defense Student Loan Program offered low-interest loans to
students via their campuses. The program is called today the Federal Perkins Loan Program,
and it focuses on low-income students (Abramson, 2007; Lumina Foundation, 2015; Maher,
2016).
The second federal student loan program, the Guaranteed Student Loan (GSL) or the Federal
Family Education Loan Program (FFELP), was created in 1965 under the Higher Education Act
during President Lyndon B. Johnson’s tenure. The Higher Education Act of 1965 was signed into
law on November 8, 1965, to strengthen the educational resources available to higher
education institutions and to offer financial support to postsecondary students (National TRIO
Clearinghouse, 2003). From the Massachusetts private program model, the Guaranteed Student
Loan (GSL) also known as the Federal Family Education Loan Program (FFELP), was created to
Page 3 of 12
101
Mbah, R. E. (2023). Financing American Higher Education: Reviewing the Trend in Student’s Perceptions of Their Student Debt. Advances in Social
Sciences Research Journal, 10(4). 99-110.
URL: http://dx.doi.org/10.14738/assrj.104.14404
lessen the burden of college education for low- and middle-income students. It offered insured
loans via private lenders and is today called the Stafford Loan Program.
In 1966, the National Association of Financial Aid Administrators was founded to supervise
financial aid all over the U.S. (Gitlen, 2016). In 1972, the Higher Education Act re-endorsed the
formation of the Student Loan Marketing Association (Sallie Mae) as a ‘government-sponsored
enterprise’ to raise funds for the Guaranteed Student Loan scheme by generating loans.
Nonetheless, it was restructured as a private entity in 1996 by Congress. Sallie Mae halted its
generation of federal loans in 2010. This was a result of the termination of the FFEL Program
and the passage of the legislation that placed the direct provision of student loans into the hands
of the federal government (Gitlen, 2016).
Likewise, in 1973, the Basic Education Opportunity Grant (Pell Grant) that was spurred by
Senator Claiborne Pell was formed to aid needy students to attend college. It was set up as a
‘foundation’ of an undergraduate student’s financial aid bundle. It is today called the Pell Grant,
named after Senator Claiborne Pell of Rhode Island. By 1978, the Middle-Income Student
Assistance Act was established by Congress to remove any income prerequisites for borrowing
under FFEL, which permitted more students to be eligible. This Basic Education Opportunity
Grant gave out grants ranging from $200 to $1,800 in the 1979-1980 academic year to
2,537,835 qualified students ($2.5 billion) so that they could attend higher education (U.S.
Department of Education, 2002; Mbah, 2020). Equally, by the mid-1970s, federal higher
education policy started to deviate from grants to loans to finance higher education for low- and-middle-income households. To widen the scope of liquidity to assist students and families
deal with the rising cost of college education, the Parent Loan for Undergraduate Students
(PLUS) program was created in 1980 for parents of dependent undergraduate students by
President Ronald Reagan’s administration (Gross et al., 2010). The PLUS program was offered
at a higher interest rate than any other federal program. A year after, it was expanded to include
independent undergraduate students, graduate students, and professional students and was
called Auxiliary Loans to Assist Students (ALAS) Program. In 1986, it was split into two
including the Supplemental Loans to Students (SLS) Program for graduates and professional
students and the Parent PLUS Program. In 1993 the Student Loan Reform Act combined the SLS
into the Unsubsidized Stafford Loan Program. To support graduate and professional students,
the Graduate and Professional Student PLUS (Grad PLUS) was formed (Lumina Foundation,
2015).
With the increase in loan default rates, Congress enacted 1986 the Higher Education Act (HEA)
Reauthorization with some policies destined to decrease default rates. Defaulters under the GSL
scheme could not postulate for new federal student aids. Also, it bestowed on the U.S.
Department of Education more administrative and regulatory powers over student loan
lenders. The first federal legislation imposing penalties on higher education institutions with
elevated default rates was passed by Congress (Gross et al., 2010). The Bush administration
was equally worried about the rise in student loan default, which led to the creation of the
cohort default rate (CDR) in 1990 via the Omnibus Budget Reconciliation Act. This canceled
student assistance qualifications at schools with elevated default rates for three continuous
years. Fundamentally, if a school had a default rate of 35%, it was eliminated, but this threshold
has varied over time. The U.S. Department of Education was given the authority to determine
the CDR threshold (Gross et al., 2010).