The Evolution of U.S. Credit, Mortgage, and Student Loans

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How and why did the cost of education and overall credit in the USA get so incredibly expensive for Americans as time progressed over the past few centuries? Harvard University, back in 1840, was the first university in the USA to establish some type of a school loan program for their early students. Subsequent to the creation of the very first Student Loan Program in America, the Department of Education (DOE) was later established back in 1867. The original purpose of the DOE was supposedly related to collecting information on various national schools and teaching methods or styles in order to try to establish a precedent for a more uniform and efficient national school system.

The financial and economic stresses associated with having endured “The Great Depression” between 1929 and 1939 coupled with the “life or death” struggles with having gone through World War II made more Americans quite fearful that they may not have enough money to meet their family’s day-to-day expenses. This overwhelming fear of not having enough access to money or security drove more Americans to try to improve their education and job options one way or another. For many people, access to new credit was one of the best ways for “peace of mind” as well as a way to invest in a piece of “The American Dream.”

student loanMore and more Americans decided to attend colleges or universities after serving in World War II. Later after the Korean and Vietnam Wars, a higher percentage of military Veterans chose to use their GI Bills, and additional affiliated benefits programs, in order to attend colleges or universities prior to hopefully finding higher paying jobs. By 1976, approximately 75% of Vietnam War Veterans may have used their benefits to attend various types of higher levels of education.

Raising a family in newer suburban communities is what more Americans wanted for their families. With the fanciest and most entertaining restaurants, museums, libraries, and community parks also being built in new Suburban regions, the Suburban lifestyle was heavily promoted and endorsed by the local movie theaters and the relatively new gadget called “Television.” Early television shows like Ozzie and Harriet, Father Knows Best, and Leave it to Beaver provided key examples of quality American family lifestyles that many viewers wanted to replicate for their own lives. In order to live the same lifestyle as seen on television back then, one needed better access to credit by way of improved access to both education and the job market.

The origin of the phrase “Keeping up with the Joneses” (or “Keeping up with Ozzie and Harriet”) may have truly began back during this post-World War II era in that young families tried to duplicate what they saw their friends and family members doing in their respective lives, which included finding a decent to high paying job in order to have enough cash to create the ideal American family lifestyle of owning one’s home. Television created an image of the proverbial stereotypical American family’s lifestyle, and viewers tried to duplicate these TV lifestyles by using more credit one way or another.

The Improving Access to Credit

credit cardShort of keeping an open “Bar Tab” at the local neighborhood bar, there weren’t too many options for obtaining credit besides FHA, VA, and the local Community Bank’s or Thrift and Loan’s automobile or business loans up until the 1950s. Frank X. McNamara, the owner of a small New York-based loan company, began to improve the access to more credit options back in early 1950 by introducing a new form of credit called “The Charge Plate.” The more common phrase used over the years has been “Credit Cards.”

Initially, Mr. McNamara’s “Charge Plates / Credit Cards” was named “The Diners Club Card” since it was originally used at local restaurants in the card owner’s immediate neighborhood. As the success and demand for “The Diners Club Card” progressed, these early versions of credit cards were later accepted at department stores, hotels, and at more and more restaurants. Since restaurant, department store, and hotel customers who had more access to credit were then more likely to spend more money at these business locations, then it meant much higher revenues for the business owners. As a result, more businesses scrambled to work with customers who held the mystical, magical, and lucrative “Charge Plate” in their wallets.

The early “Diners Club” later drew interest from larger companies such as “American Express” and “Carte Blanche.” Both of these firms soon purchased the “Diners Club” card, and the Consumer Finance industry skyrocketed from there back in the mid-20th Century. With the increased access to credit, then more Americans began to feel the need to increase their income as well as their access to credit partly by seeking higher levels of education in order to later find the best paying jobs out there, which may hopefully one day support their more lavish and expensive Suburban and “Big City” lifestyles.

The Expansion of Student Loans

As the U.S. population continued to grow and expand, the demand for college applications and quality high paying jobs, which would help to support the expenses associated with living out in Suburbia, caused more people to seek new ways to find credit by way of credit card loans, school loans, business loans, and home loans. In order to be able to cover the rapidly increasing monthly debt expenses, then Americans had to work longer hours at the office to support these higher monthly and annual expenses.

In the same 1950s decade, the very first Federal Student Loans offered to the American public were provided under the National Defense Education Act of 1958. These new direct loans were funded by way of U.S. Treasury Bond funds. In 1965, the Federal Government began to guarantee student loans offered by both banks and non-profit lenders by way of a program called “Federal Family Education Loan” (FFEL).

college costIn 1966, the National Association of Student Financial Aid Administrators (NASFAA) was created in order to act as an oversight committee for the ever evolving “Financial Aid” or “Student Loan” sectors for the USA. As college costs began to increase at a rapid pace, a higher percentage of students had to borrow third (3rd) party funds in order to cover the expenses related to a four (4) year plus education.

Student Loan interest was a tax deductible interest expense just like the credit card and home mortgage interest deduction up until “The Tax Reform Act of 1986” (“TRA 1986”) was passed in Washington D.C. While the top tax rates for the wealthiest Americans were lowered after the passing of this 1986 Tax Reform Act, a section of this act eliminated the deduction of personal interest items such as Student Loan Interest.

For the next decade plus between 1986 and 1997, Student Loans were considered as non-deductible tax expenses for Americans. However, this later changed after “The Taxpayer Relief Act of 1997” was passed, which did allow Student Loans to be tax deductible once again beginning in 1998. These new tax deduction options for Student Loans helped people reduce their Adjusted Gross Income (AGI), which also lowered their overall taxes due in many cases.

“The Omnibus Reconciliation Act of 1993”, as part of the 1993 Congressional budget agreement, passed and was implemented after various studies noted that “Direct Student Loans” would be less costly and potentially easier to manage or administer than “Guaranteed Student Loans.” As part of then President Clinton’s early deficit reduction plans, numerous studies reported that these new “Direct Student Loans” would deliver the same dollar amount of Student Loans to people at much lower costs for U.S. taxpayers. Yet, “Guaranteed Student Loans” remained more widely used and endorsed by politicians than the newer “Direct Student Loan” programs, which seemed to be more cost effective for students and taxpayers.

mortgage loansWith the “Taxpayer Relief Act of 1997”, deductible interest payments were first capped at just a maximum of $1,000 per year in 1998. Later, the deductible interest payment levels slowly increased in amounts of $500 per year over the next several years. However, taxpayers were initially limited to just the first five (5) years’ worth of interest payments on the loan. In 2001, “The Economic Growth and Tax Relief Reconciliation Act of 2001” (EGTRRA) later eliminated that five (5) year interest rate deduction cap limit.

Student Loans, Mortgage Loans, & The Credit Crisis

student loansWhen the near financial meltdown of both the U.S. and world’s financial markets began to worsen and accelerate between the Summer of 2007 and the Fall of 2008, the access to various types of credit tightened up considerably. As the widespread credit market disruptions worsened between 2007 and 2010 especially, the credit market turmoil adversely impacted and hindered many private lenders from continuing to offer loans using the federal guaranteed student loan program. As a result, many private lenders changed their lending focus by moving from the “Guaranteed Student Loans” back over to the “Direct Student Loans” once again. Since 2008, the percentages of “Direct Student Loans” offered by various lenders began to rapidly increase once again nationally.

The Federal Family Education Loan (FFEL) program was modified by Congress back in May 2008 due to the ongoing disruptions and reduced access to the credit markets. Both Congress and then President George W. Bush created a temporary program which allowed the Department of Education to purchase “Guaranteed Loans” made by private lenders. The net proceeds from these loans were to be applied towards new student loans by way of “The Ensuring Continued Access to Student Loans Act” (ECASLA). The ECASLA program helped to provide capital from the federal government to private lenders who were making student loans. As a result, this new version of a “Guaranteed Student Loan” program shared many of the same characteristics and benefits as the “Direct Student Loan” program, and it became somewhat of a combination or hybrid between the “Guaranteed” and “Direct” programs.

federal family education loanIn 2010, “The Federal Family Education Loan” (FFEL) program was completely eliminated by Congress and President Obama in order to attempt to reduce expenses by tens of billions of dollars over the span of the next ten (10) years. Since July of 2010, the vast majority of federal student loans have been offered under the “Direct Student Loan” program. Seemingly every year thereafter as well as before 2010, U.S. politicians and high ranking financial leaders discuss new ways to change the Student Loan Program system with options such as lower or higher interest rates, modified loan term time periods, and other new ideas.

Sadly, college tuition costs continue to rapidly increase with $30,000 to $50,000+ per year annual tuition fees becoming more of the norm across our great nation. How many years will a young person need to work full-time just to be able to hopefully one day pay off his or her undergraduate or graduate college tuition fees? Only time will tell for each person severely burdened with high priced college loans whether or not this debt may ever be paid off in full.

Ironically, one of the main reasons for taking out an expensive Student Loan is to be able to find a high paying job, which may later allow a person to qualify for a home mortgage. However, a potential outstanding Student Loan debt of $100,000 to $200,000 may be higher than the potential mortgage loan for a new “American Dream Home”, and the primary reason why a potential mortgage borrower doesn’t qualify for a new home, tragically ironically. Let’s all hope for an improving job market and overall economy so that more Americans have the opportunity to pay off their debts as well as the opportunity to invest in “The American Dream.”


Author: Rick Tobin

Rick Tobin Professional Pic sharperLook for Rick’s ebook on Amazon Kindle: The Credit Crisis Deals: Finding America’s Best Real Estate Bargains.

Rick Tobin has a diversified background in both the Real Estate and Securities fields for the past 25+ years. He has held seven (7) different Real Estate and Securities brokerage licenses to date.

Rick has an extensive background in the financing of residential and commercial properties around the U.S with debt, equity, and mezzanine money. His funding sources have included banks, life insurance companies, REITs (Real Estate Investment Trusts), Equity Funds, and foreign money sources.

You can visit Rick Tobin at RealLoans.com.

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