'Throughline': The origins of federal student loans and promises the government made

LEILA FADEL, HOST:

Around 46 million Americans are saddled with $1.7 trillion in student debt. President Biden is expected to announce by the end of the month whether he'll extend the pause on federal student loan payments again. At the same time, many are anxiously waiting to find out if Biden plans to forgive some of that debt. This has started debate over the government's role in helping to pay for higher education. Today, Rund Abdelfatah and Ramtin Arablouei at NPR's history podcast Throughline take us to the beginning of the debate that started decades ago.

RAMTIN ARABLOUEI, BYLINE: In the decade after World War II, the United States emerged as a world superpower. It was the Cold War, and the U.S. was at the top of the game, a world leader in production, innovation and technology.

JOSH MITCHELL: And then everything changes on a Friday evening in October of 1957.

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DOUGLAS EDWARDS: Until two days ago, that sound had never been heard on this Earth.

MITCHELL: A news item comes across the radio that says the Soviet Union has made it to space.

ARABLOUEI: This is Wall Street Journal reporter Josh Mitchell. He wrote a book called "The Debt Trap: How Student Loans Became A National Catastrophe."

MITCHELL: About a month later, the Soviet Union launched Sputnik 2. And this was, like, a double blow. I mean, it was - you know, it was just, like, shocking again.

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RUND ABDELFATAH, BYLINE: Shocking for the U.S., who viewed the Soviet Union's advancement of science and technology as a threat, a sign that it might be moving ahead in the ongoing Cold War. And some Democrats wanted to use this moment to expand the government's role in higher education to compete. After all, they argued, it wouldn't be the first time the government stepped in to pay for higher education. Back in the 1940s, Congress had passed the GI Bill to give scholarships to returning veterans, and that was largely seen as a success.

MITCHELL: And 11 months after the first Sputnik, Congress passed the National Defense Education Act.

ABDELFATAH: The National Defense Education Act was targeted basically just for high-achieving, generally white male high school students, students who wanted to go into math, science and foreign language - things that could help the country's national defense. Although it was popular, it wasn't a program designed for everyone, like some Democrats wanted.

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LYNDON B JOHNSON: Will you join in the battle to build the great society?

ARABLOUEI: President Lyndon Johnson created a broad legislative agenda to fight poverty and inequality, what he called great society. And at the center of this agenda was education. Johnson grew up poor and actually got a private bank loan to go to college himself. And in 1963, when he inherited the presidency after the assassination of President John F. Kennedy, he finally had a chance to make his education agenda happen.

MITCHELL: So in 1965, he pushed Congress to pass the Higher Education Act.

ARABLOUEI: Unlike the National Defense Education Act, which gave money to schools, this act gave money directly to students. The only catch?

MITCHELL: Instead of it being a scholarship, these were loans.

ABDELFATAH: The idea Johnson was pitching was that the Higher Education Act would make student loans with grants to provide more people with the chance to go to college. But it was going to be expensive, and the government couldn't afford to foot the bill. So if the Johnson administration wanted to make higher education universally accessible, it had to get the banks on board.

MITCHELL: To convince banks to do this, they came up with what was called the Guaranteed Loan Program and basically said, if you give this student a loan and that student fails to repay, ultimately, we will make you whole. So guess what? You're not taking on that much risk because ultimately the government's going to step in and pay you back.

ABDELFATAH: And the Johnson administration assumed that the program wouldn't cost taxpayers anything because everyone would get out of college, get good jobs, and be able to repay their loans. But while college attendance shot up in the late 1960s and '70s, so did inflation.

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UNIDENTIFIED PERSON #1: Food costs are very much increased.

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UNIDENTIFIED PERSON #2: I think my wife just went out and bought me some shirts the other day, and I can't believe what they cost.

ARABLOUEI: There were higher prices, higher unemployment, and banks weren't totally happy loaning to students, even with the backing from the government. At the same time, more people wanted to go to college. And so in 1973, Johnson's successor, President Richard Nixon, supported a new idea, a government-backed private company that could help get more loans to more students. It would be called Sallie Mae.

ABDELFATAH: Sallie Mae's board was made up of government appointees, banks and schools. And what they decided was Sallie Mae would play the role of a middleman, administering student loans from banks that are guaranteed by the government. And it ended up being very good for banks and private partners.

MITCHELL: The banks have no risk at this point. They had zero risk. In fact, the only risk they had was not getting money fast enough out the door because every time they did not make a loan, they were leaving profits on the table.

ARABLOUEI: The '80s saw a rise in tuition, a rise in the number of student borrowers and a rise in debt. Meanwhile, Sallie Mae was raking in the cash, and hundreds of new schools popped up to meet the growing demand for higher education. Many of them were for-profit specialty schools.

MITCHELL: And so if you take a look at a chart of college tuition, it would go up a little bit in the '50s and '60s, and then it was kind of flat in the '70s, and then it just soared in the '80s.

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ARABLOUEI: Student debt continued growing, and it didn't really hit the national consciousness until around the 2010s, following the Great Recession, when more people started talking about student debt...

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BARACK OBAMA: Michelle and I, we know about this firsthand. This is not something I read in a briefing book.

ABDELFATAH: ...Including President Barack Obama.

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OBAMA: We had a mountain of debt, both of us. That means when we got married, we got poorer together.

ABDELFATAH: And attached to the bill that enacted Obamacare was an amendment that also ended Lyndon Johnson's guaranteed student loan program. The changes mean the federal government now loans to students directly.

ARABLOUEI: But the problem of rising student loan debt remains. And Josh Mitchell says even if President Biden forgives some of that debt, it won't stop more students getting into more debt in the future.

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FADEL: That was Ramtin Arablouei and Rund Abdelfatah. They're the hosts of the podcast Throughline. You can hear the whole episode by finding Throughline wherever you get your podcasts. Transcript provided by NPR, Copyright NPR.