WASHINGTON — As Congress scrambles to pull back a messy student loan rate increase, it raises the question: Why did Uncle Sam get into the college loan business, anyway?
The short answer: Because the Russians launched Sputnik.
A look at the more than half-century history of federal student loans:
1957: Americans got a shock from the sky in October that year. The first artificial satellite was passing overhead. And it wasn’t just man-made, it was Soviet-made. Beach ball-sized Sputnik touched off a space race and stoked big fears that American students might not be up to the challenges of the Cold War.
Calls to improve science and technical education led President Dwight Eisenhower to establish a low-interest college loan program through the National Defense Education Act of 1958. The loan dollars came directly from the government.
1965: Lyndon Johnson’s “war on poverty.” Student loans got a major boost that year as part of the president’s Great Society initiatives.
The Higher Education Act expanded loans as well as grants to help needy students, contributing to the era’s college boom. It also changed the way the federal loan program was financed. Instead of using government money directly, the loans would be made by bankers. But the government guaranteed if students defaulted, the U.S. government would cover the tab.
Lawmakers liked that approach because outstanding loans wouldn’t show up on the government’s books as red ink.
1972: That led to the birth of Sallie Mae. President Richard Nixon spearheaded creation of the Student Loan Marketing Association — known by the nickname Sallie Mae — to help get more money to college students.
Sallie Mae was a “government-spon- sored enterprise.” It got help from the U.S. Treasury to buy up banks’ stu- dent loans, freeing up the banks’ money and encouraging them to do more federally insured lending.
Sallie Mae was fully privatized in 2004 and is now a corporate giant of the private student loan and college savings businesses.
1990s: Taxpayers took the risk; bankers got the rewards.
Using private companies to handle government-backed loans proved to be more complicated and expensive for taxpayers than direct federal loans. So President Bill Clinton sought to switch back to a direct-loan system more like the one in the Sputnik days. But many Republicans opposed direct loans as a government takeover. And private lenders didn’t want the feds moving in on their lucrative market. Congress compromised by phasing in some direct federal loans while keeping guarantees in place for the bank loans.
For more than a decade, the banks appeared to be winning the battle against direct loans. Colleges largely decided which kinds of loans to offer their students, and the aggressively marketed private loans were more popular than the lesser-known government alternative.
2008: The financial crisis six years ago changed everything. With chaos on Wall Street and credit markets in a tailspin, private student loan money started drying up. To keep money flowing to students, Congress gave the Education Department power to step in and buy loans from cash-strapped lenders.
The number of colleges turning to direct federal loans shot up.
2010: Uncle Sam took over.Private lenders waged an intense lobbying campaign to keep the government-backed student loan market. But Congress OK’d President Barack Obama’s plan to give banks the boot. Now, the federal student loan program belongs to Washington. Banks and other private lenders still loan money to students on their own, without a federal guarantee.
2013: Under today’s system, direct federal loans are considered the better deal. They generally have lower interest rates. And the feds offer flexible payment options.