Federal Student Loans Prt. I- The Historical Foundation for Secondary Education

What are the roots of our current secondary education system and the loans that make it possible for students to get their degrees?  While alarms are going off around the country in various circles about the growing student loan bubble- and its probability of bursting- its important to remember the historical underpinnings of college education in this country.  Understanding the history also makes it possible to understand the modern debates, especially those around affirmative action in the admission process.  Prior to World War II, a university education was an exclusive enclave of the American aristocracy; largely white, protestant, male population going to Ivy League schools and a handful of public institutions like UC Berkley and University of Michigan.

Beginning in 1944, with the GI Bill, direct subsidies for education to returning veterans, provided an avenue not only poor whites to access a college education but also Blacks and other minorities.  The government incentivized college education by utilizing various legislative mechanisms and initiatives to provide students with access to higher education in their efforts to compete with the Soviet Union during the Cold War.  Travel to the moon, building missiles that went longer distances and weaponry that was stealth required a sophisticated talent and a larger pool from which to find the most talented students from.  The Bill didn’t just give money to would-be college students, it was coupled by a change to the federal tax system in order to create a push-pull mechanism that reward mature and responsible behavior.

Historically the federal tax system has assisted certain activities by removing either partially or totally the burden of taxation.  The Internal Revenue Code was primarily designed to supply government revenue, however, through tax incentives the government engaged in a systemized mechanism to promote economic activities it preferred over others- here the deduction served as a tool to promote higher education.  The first time itemized deductions for interest paid on student loans appeared were under the 1954 Tax Code, however, by 1967 the definition for student loans was changed, preventing further benefit from itemized deductions.  However, the premise remained, the government wanted to reward economic activities it sought to gain from.  By creating the reward mechanism, the government hoped to gain a larger pool of skilled and educated workers to take on the roles of the new Cold War and defense spending economy, what President Johnson referred to as the Military-Industrial Complex.  This was especially true for the sciences, where the government hoped the most talented students would feed into the private and government military defense contracting firms.

Deductions were originally introduced as early as the Civil War Income Tax Act, however, prior to the sixteenth amendment the government could only collect revenue by imposing high tariffs and an excise tax, and states and local governments taxed property.    President Woodrow Wilson signed the Underwood-Simmons tariff bill, which became the first income tax under the authority of the Sixteenth Amendment in 1913 allowing for itemized deductions, in particular, on interest paid.  The 1954 Tax Code expanded the itemized deductions to encompass student education loans in full.  Thus providing further impetus to students around the nation to pursue secondary education and for parents to benefit from tax deductions.

Part II- The College Student Population Explosion- Culture, Politics and Revolution

Further Reading:

  • Sima J. Gandhi, Understanding Students from A Behavioral Economics Perspective: How Accelerating Student Loan Subsidies Generates More Bang for the Buck, Kan. J.L. & Pub. Pol’y 130, 132 (Winter 2007-2008)
  • Federal Tax Incentives for Higher Education, 76 Harv. L. Rev. 369, (1962)
  • Charlotte Crane, Scholarships and the Federal Income Tax Base, 28 Harv. J. on Legis. 63, 109 (1991).
  • Senator Pete V. Domenici, The Unamerican Spirit of the Federal Income Tax, 31 Harv. J. on Legis. 273, 276-277 (1994).

This series is based off of the ABA Resolution Committee research I conducted.  It was a fascinating project and something that I learned immensely from.  Prior to working on the research I had been concerned about the rising costs of attending college and the sharp drop in the value of a Bachelors degree.  Worse, the corporatization of public institutions, like my own alma mater UCSD, is painful to watch.  The current process and challenges faced by our public education institutions stem from what was meant to be an opportunity to expand the education system to a broader American populations.  Solutions to the student debt crisis are not simple nor are they straight forward, and a lot of it is tied to race and discriminatory policies.  

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