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History Lessons in Financial Aid:
No fairies or leprechauns herepresented by
Julie Meyer & Michelle Mohn
Special thanks to Dave Rice in researching and preparing these materials
Today’s Agenda
• Four eras– The early years prior to 1979
– The 1980s
– The 1990s
– The first decade of the new millennium
• Four issues– The economy
– Regulations
– Processing and technology
– The competition
The Nation’s 1st University
• Harvard established 1636
• 1643 = First Harvard scholarship program
• 1840 = First student loan offered at Harvard
Key Dates• 1636 = Our nation’s first postsecondary institution,
Harvard, is established
• 1958 = National Defense Student Loan Program (precursor to Perkins Loan Program)
• 1965 = The Higher Education Act (HEA) creates the Federally Insured Student Loan Program (FISL)
• 1966 = NASFAA created
• 1967 = MASFAP created
More Key Dates• 1978 = Guaranteed Student Loan (GSL) Program
• 1992 = GSL renamed FFELP & DL created
• 2006 = Higher Education Reconciliation Act (HERA)
• 2007 = College Cost Reduction and Access Act (CCRAA)
• 2008 = ECASLA (June) and HEOA (August)
• 2009 = Our nation’s first African-American President takes office
The Early Years1979 and before
The GI Bill of 1944President was Franklin D. Roosevelt
Large numbers of WWII veterans returning home
GI BILLAct of June 22, 1944
The Servicemen's Readjustment Act of 1944 put higher education
within the reach of millions of veterans of World War II and later
military conflicts.
The Cold War & Space Race
• Sputnik program 1957
• President was Dwight “Ike” Eisenhower
• New focus on science and technology to compete with the Soviet Union
Response to Sputnik
President Eisenhower in front of a Saturn 1 vehicle at the Marshall Space Flight Center dedication on September 8, 1960
LBJ’s educational message• Higher education opportunities for lower and middle class families
• Utilization of postsecondary resources to help combat poverty
• Improved libraries on campuses
• Assistance to smaller colleges
1950 and 1970: The economy
1950 1970
U.S. population 151.7 million 204.8 million
Unemployment 3,288,000 4,088,000
Annual average salary $3,210 $9,350
New house price $8, 450 $23, 400
New car price $1,510 $3,900
Gallon of gas 18 cents 36 cents
Life expectancy 71.1 (women)65.6 (men)
74.8 (women)67.1 (men)
National debt (unavailable) $382 billion
Student Loan Terms
• 5% interest subsidy for student loan borrowers:– while in school
– for families with incomes of less than $15,000
• Loan limits– Annual = $1,500
– Aggregate = $9,000
• Loan funding sources– Federal government
– Private lenders (beginning October 16, 1968)
Early SFA Regulations
• Minimal FISL regulations defining:– Borrower eligibility and school certification requirements
– Loan terms (interest rates, etc.)
• Federal Student Aid Handbook 1979– Reference document explaining regulatory requirements
– 1979-80 edition:• 10 chapters
• About 150 pages
• Table of contents less than a page
Early Processing and Technology
• The FISL experiment (and failure)– Zero technology
– Loans processed 100% manually and via paper
– Stories commonly told by FAOs• Lost applications
• Loans that were never funded/disbursed
• Processing turnaround time (TAT) = months long
The Early Competition
• Private lenders enter the market October 16, 1968– Lenders reluctant to sink investment dollars into borrowers
with little to no income and no proven credit history
– No real competition between private lenders and federal government
The 1980s
Early Technology
• Pacman hit video arcades in 1981
ReaganomicsReagan was a proponent of large tax cuts, a strong military (“peace through strength”), and “trickle down” economics
The end of the cold warThe Berlin Wall is torn down in 1989, representing an end to the “iron curtain”
The 1980’s Economy
1980
U.S. population 226.5 million
Unemployment (unavailable)
Annual average salary $19,170
New house price $68,714
New car price $7,210
Gallon of gas $1.19
Life expectancy 77.6 (women)69.9 (men)
National debt $914 billion
1980’s Student Loan Terms
• High, high interest rates nationally– Student loan rates rise, ranging between 8% and 14%
• Fees on student loans introduced August 23, 1981– Guarantee Fee = 3%
– Origination Fee = 5%
• Generous revenues for lenders– Change in special allowance so that yield floats according
to the Treasury-Bill auctions (T-Bill plus 3.5%)
Regulations in the 1980s• Federal laws and regulations steadily increase
– Guaranteed Student Loan Program (GSL) created 1978• Guarantors offered individual policy guidance
– January 1, 1981:• Grace period introduced
• Loan limits segmented
• Additional loan types created
– During 1986:• Exit counseling requirement introduced
• Disbursement and delivery rules made more complex
• Deferments become significantly more difficult to obtain
• Refund rules and formulas introduced
• Lender of Last Resort (LLR) created
1980’s Processing &Technology
• Processing 90% manual; technology beginning to be introduced– University of Missouri implements one of the first home-
grown FAMS in country
– WhizKid introduced in 1985 by USA Funds
• Large number of participating lenders and most processed in house– 750 lenders in Missouri
Competition in the 1980s
• Friendly competition on a small scale– Technology and products
– Lender competition
– Guarantor competition• Each state = designated guarantor
• Two main “national” guarantors competing against state-designated guarantors
– USA Funds
– Higher Education Assistance Foundation (HEAF)
The 1990s
President Bill Clinton
• Proposed direct lending during his campaign
The 1990’s Economy
1990
U.S. population 281.4 million
Unemployment 5,800,000
Annual average salary $28,970
New house price $123,000
New car price $16,000
Gallon of gas $1.34
Life expectancy 79.1 (women)73.1 (men)
National debt $5.4 trillion
1990’s Student Loan Terms
• Interest rates decline dramatically
• Student loan fees decline– Lenders, servicers, and guarantors introduce fee
subsidies, borrower benefits, and other aggressive pricing strategies
• Trend begins of cutting revenues to lenders, servicers, and guarantors– Smaller, hometown lenders exited program
– Remaining lenders began using servicers heavily
Regulations in the 1990s• 1992 Reauthorization
• Cohort Default Rates (CDRs) introduced– Schools with high CDR not eligible to participate in Title IV
– 30-day delayed delivery of loan funds
• Common forms and reporting formats– Common Manual introduced in 1995
• Variable interest rates– Stafford rate based on the 91-day T-Bill with a cap of
8.25%
1990’s Processing &Technology
• Early 1990s = School-based software (SBS)
• Late 1990s = Web-based loan delivery products
• After 1992 reauthorization– Numbers of lenders declined
– Servicing gained efficiencies and decreased costs
• Common forms and formats– CommonLine
– Common application
– Central Disbursing Agents (CDAs)
• NSLDS replaced the paper FAT
Competition in the 1990s
• Competition heats up– DL program created by 1992 reauthorization
• Complete phase out of FFELP planned (did not happen)
– FFELP response: collaboration• Common Manual
• CommonLine
• ELM
• CDAs
– Competition factors• Pricing
• Anti-inducement regulations
The First Decade of the New Millennium
Hurricane Katrina August 2005
http://news.aol.com/story/_a/flood-puts-city-in-iowa-at-gods-mercy/20080612191009990001
http://www.walletpop.com/loans/what-the-wall-street-crisis-means-for-you?icid=100214839x1210519818x1200650140
The Year 2000
2000
U.S. population 300 million
Unemployment (unavailable)
Annual average salary $40,343
New house price $134,150
New car price $24,750
Gallon of gas $1.26
Life expectancy (women) (men)
National debt $10.25 trillion
The New Millennium & Student Loans
• Interest rates stay low
• Student loan fees– Origination Fee is phased out by the HERA
– 1% FDF required by HERA
• Massive cuts to revenues by CCRAA
• “Credit crunch” begins late 2007– LLR plans updated in preparation
Regulations• All Title IV programs heavily micro-managed
– FSA Handbook grown to 8 volumes comprised of 8-10 chapters each
– FINAID-L
• Continuous year-round legislation– Higher Education Reconciliation Act (HERA) – 2005-06
– College Cost Reduction and Access Act (CCRAA) – 2007
– Ensuring College Access (ECASLA) – 2007
– Higher Education Opportunity Act (HEOA) – 2008
Processing andTechnology
• 90-99% of FAFSAs and loan applications processed online– Electronic signature
– Master Promissory Note (MPN)
– Student loan change transactions
• Private/alternative loans
• LLR procedures allow school-based participation
Competition
• Early 2000s: Competition frenzied; financial aid community flooded with sales visits and pressure– Controversy over student loan marketing practices
• Cuomo investigations
• New focus on ethics and conflicts of interest
• Post credit crunch– Competition cools down
– Pricing changes
– Liquidity concerns
The Future
To understand where we might be headed, we must first understand where we have been . . . And why
The Future
• National discussions about the future of financial aid and student loans– NASFAA’s “national conversation”
– College Board report September 2008
– President Obama’s budget proposal
– Competitive PLUS Auction
Questions?
Julie Meyer
Marketing Director
MDHE
(573) 526-3026
Michelle Mohn
Financial Aid Director
St. Louis College of Health Careers
(314) 652-0300
