History of Financial Aid

Financial aid for students continuing on to higher education has been around longer than you think. From the first university scholarship awarded in 1643, to present day, discover the highlights of financial aid throughout American history.

1643 First scholarship. Awarded at Harvard University. Funds provided by a private donor, Lady Anne Radcliffe Mowlson.
1787 Northwest Ordinance
Land Grant (Morrill) Act
On July 2, 1862, a land grant bill, introduced by Representative Justin Smith Morrill of Vermont, was signed by Abraham Lincoln. American colleges benefited from the provisions of the Morrill Act. It gave to the states federal lands for the establishment of colleges offering programs in agriculture, engineering, and home economics as well as in the traditional academic subjects. The colleges established on these former federal lands are often called “Land Grant Colleges.”
Another provision of the Morrill Act called for the establishment of a military training program, now part of the Reserve Officers’ Training Corps (ROTC), at every land-grant college. Although the law did not require compulsory participation, nearly every state made it so by the 1920s After World War II, however, participation in ROTC was generally on an elective basis.
Hatch Act
The Hatch Act of 1887 expanded the land-grant program by providing federal funds for the creation of agricultural experiment stations for scientific research.
1890 Second Morrill Act
1914 Smith-Lever Act
1919 Rehabilitation Act
GI Bill
On June 22, 1944, President Franklin D. Roosevelt signed the Servicemen’s Readjustment Act of 1944, better known as the GI Bill of Rights. This law was very controversial at the time but has since been recognized as one of the most important acts of Congress. The GI Bill had the secondary impact of popularizing the idea that large numbers of people could benefit from a college education1.
1950s With the growth of endowments and scholarship funds at colleges across the United States in the early 1950s it became necessary for most institutions to develop their own formula for the distribution of those funds.
The College Scholarship Service (CSS) was founded by a cluster of 95 private colleges and universities located in the northeastern section of the country. This group developed a standard need analysis system to determine the financial need of student applicants. The system established criteria to measure college students and their families’ ability to contribute to their education based on family income and assets. They developed a form to collect information from students and collected a fee from students for each college to which the information was sent.
The CSS need analysis system became the established method of allocating need-based aid.
Initially need was determined using the work of Rexford Moon from a New York headquarters based on early efforts into need analysis on the work of John Munro, Director of Financial Aid at Harvard. The Harvard system of measuring need had been refined by groups of Western colleges and universities, which developed common procedures and forms for analysis. A group of eastern institutions then brought about a similar process of refinement, and by 1956 a tentative national system, developed by the higher education community for use in awarding institutional aid, was in place.
Regardless of motives, the establishment of a system based upon measuring the student’s or his family’s ability to pay for the cost of education provided the beginning of a philosophy that aid should be awarded on the basis of need. The system also provided for financial aid administrators to meet together.
The College Scholarship Service was the dominant group in the early training and association activities of the members of a newly emerging branch of higher education administration2.
Sputnik Launched
In the decade after World War II, while the economy was adjusting to meet an unprecedented peacetime prosperity and the population was rapidly expanding, there was little public demand for the federal government to become involved in assisting students seeking a college education.
However, in 1957, an external event dramatically changed a complacent public attitude toward government involvement in aid to education. The Soviet launching of Sputnik in the fall of that year evoked an outcry from the American people, who were culturally unprepared to be second-best in anything — especially second to the Russians in outer space.
Congress swiftly denied any responsibility for the apparent American inferiority blaming our educational system “The real problem lay in the weakness of the American education system and would require a new dynamic and total commitment to the problems facing higher education3.”
National Defense Education Act (NDEA)
This legislation provided aid to education in the United States at all levels, public and private, stimulated the advancement of education in science, mathematics, and modern foreign languages, provided aid in other areas as well, including technical education, area studies, geography, English as a second language, counseling and guidance, school libraries and librarianship, and educational media centers, provided institutions of higher education with 90% of capital funds for low-interest loans to students, gave federal support for improvement in elementary and secondary education, contained statutory prohibitions of federal direction, supervision, or control over the curriculum, program of institutions, administration or personnel of any educational institution, and established the National Defense Student Loan Program (NDSL).
This student loan program offered long-term, low-interest loans to qualified students, first in the targeted fields of mathematics, science, and foreign languages, and later in all academic majors. The National Defense Student Loan Program was later renamed the National Direct Student Loan Program (NDSL). Today it is known as the Federal Perkins Loan Program.
By the early 1960s the College Scholarship Service (and its parent organization, the College Entrance Examination Board), had developed influence over national policy, as had the umbrella presidential higher education association, the American Council on Education (ACE).
The EOG Program was the first federal grant program providing federal student assistance in the form of gift aid that, unlike loans, did not have to be repaid, and, unlike College Work-Study, did not have to be earned through work. This program was intended to help the neediest students.
EOG Program was later renamed the Supplemental Education Opportunity Grant Program (SEOG) and then renamed the Federal Supplemental Education Opportunity Grant (FSEOG).
Economic Opportunity Act
The Economic Opportunity Act signed into law on August 20, 1964, by President Lyndon B. Johnson recognized that education was crucial to fight the nation’s War on Poverty.
This legislation created the College Work-Study Program (now known as the Federal Work-Study Program) which gave federal funds to schools so they could provide needy students with part time employment opportunities while pursuing their college degree.
Although designed primarily to combat poverty wherever it existed in the United States, this act directly affected higher education in a number of ways. It not only involved colleges and universities in the administration and operation of such programs as Head Start, Upward Bound, Vista, and Job Corps, but also made available a combination work-study program for economically deprived college students, which later was transferred to the Office of Education4.
Higher Education Act
The Higher Education Act of 1965, which has been amended many times since it was enacted, forms the basis of current law authorizing the federal student aid programs. The student aid programs administered by the U.S. Department of Education are contained in Title IV of the HEA, which is why they are referred to as “Title IV Programs.” This comprehensive piece of higher education legislation established federal scholarships for needy undergraduate students and made provision for government insurance on private loans to students It consolidated laws authorizing the National Defense Student Loan Program and the College Work-Study Program, created two new programs: the Educational Opportunity Grant Program and the Guaranteed Student Loan Program.
In the 1970s, due to the coming of age of the baby boomer generation, the college population increased significantly. Many needy students were unable to attend post-secondary institutions because of limited funds and also due to an uneven distribution of campus-based funds.
Funds for the campus-based programs are generally very limited. And, a student’s ability to receive funds to meet his or her need for attendance at a particular institution had always been based on whether that school hadfunds available to offer an award.
Higher Education Amendments (Reauthorization)
The Higher Education Amendments responded to the disparity of funding among institutions by creating in the Basic Opportunity Grant Program, known as the BEOG Program or “Basic Grant.” This program is now known as the Federal Pell Grant Program.
Basic Grants were intended to serve as the “floor” or “foundation” of an undergraduate student’s financial aid package. Other financial aid, to the extent that it was available, would be added to the Basic Grant up to the limit of a student’s financial need.
The BEOG Program introduced the concept of portability in the federal student financial aid programs. As opposed to Campus-Based Aid, where the College makes the determination of which students will receive funding and in what amounts. By providing portability, BEOG offered students not only access to post-secondary education; but, for the first time choice among institutions.
Most changes to the federal student aid program result from a process called “reauthorization”. Through the process of reauthorization, Congress examines the status of each program and decides whether to continue that program, and whether a continued program requires changes in structure or purpose The campus-based programs have been reauthorized every five or six years beginning in 1972.
The Higher Education Amendments of 1972:
  • Reauthorized the three campus-based programs;
  • Renamed the National Defense Student Loan Program as the National Direct Student Loan Program;
  • Renamed the Economic Opportunity Grant Program the Supplemental Educational Opportunity Grant Program (SEOG);
  • Proprietary (profit-making) schools became eligible to use Title IV Funds; and
  • The Educational Opportunity Grant Program would no longer function as a stand-alone program of gift aid, but instead would be linked with the Basic Grant Program.
1975 National Task Force on Student Aid Problems. The Task Force was chaired by Francis Keppel and became known as the Keppel Task Force.
Higher Education Amendments
The 1976 HEA reauthorized all existing federal student financial aid programs, required that students make satisfactory academic progress to receive Title IV funds, introduced student consumer-information provisions requiring participating institutions to provide information on topics such as academic progress, job placement for graduates, and financial aid policies and procedures.
Middle Income Student Assistance Act (MISAA)
This legislation eliminated all income restrictions for the Guaranteed Student Loan Program (GSL), which effectively extended eligibility to middle and upper-middle income students. MISSA also expanded eligibility for BEOG for these same students.
Higher Education Technical Act
Authorized the “Commissioner” of Education (now the Secretary of Education) to collect defaulted National Direct Student Loans on behalf of institutions. This provision was significant particularly for state institutions that previously were unable to “assign” such loans to the Department for collection because of state laws barring the assignment of state assets.
Higher Education Amendments
Congress sought to honor the work of a man whose long term advocacy and support of programs that legislated increased federal funding made college a reality for millions of students. Accordingly, the Higher Education Amendments of 1980 renamed the Basic Education Opportunity Grant Program the Pell Grant Program after Rhode Island’s Senior Senator Claiborne Pell.
As a result of the 1980 Amendments the Parent Loan for Undergraduate Students (PLUS) Program was also established. Middle-income families were now able to borrow $3,000 a year for each dependent child in school regardless of parent income.
Omnibus Budget Reconciliation Act (OBRA)
Congress reversed the trend toward greater and greater expansion of student loan eligibility by imposing a new need test to limit student loan interest subsidies to applicants with family income below $30,000.
Defense Authorization Acts of 1982 and 1983
A new requirement was imposed that men between the ages 18 to 25 be registered with the Selective Service in order to be eligible for federal student assistance.
Balanced Budget and Emergency Deficit Control Act
In an effort to cut costs, Congress passed the Balanced Budget and Emergency Deficit Control Act of 1985, better known as Gramm-Rudman-Hollings. This law provided that, if specific levels of deficit reduction were not achieved within specific time frames, rescissions must be made to the funding of most federal programs — including student aid programs.
Higher Education Amendments of 1986
Restricted eligibility for federal educational loans by requiring all applicants for Guaranteed Student Loans to demonstrate financial need for the interest subsidy, regardless of income, limited the PLUS Loan Program to parent borrowers eliminating graduate students and independent undergraduate students, created the Supplemental Loan to Students (SLS) to provide loans to graduate and professional students and independent undergraduate students, established limits on duration of student’s eligibility for Pell Grant funds, restricting such eligibility to a specified number of years of full-time enrollment, linked Pell Grants and SEOG, by giving Pell Grant recipients priority for the SEOG, gave student financial aid administrators broader authority to exercise their professional judgment in all the Title IV programs to reflect a student’s exceptional circumstances, changed the name of the National Direct Student Loan Program to the Perkins Loan Program in honor of the late Congressman Carl D. Perkins, a long-time advocate of student aid.
1987 Between 1987 and the next reauthorization of the Higher Education Act in 1992, Congress used the method of appropriations several times to make one-year cost-reduction changes, primarily in the Pell Grant Program. Specifically, Congress eliminated the applicability of professional judgment to the Pell Grant Program and rescinded Pell Grant eligibility for less-than half-time students in order to reduce costs.
1988 The Supplemental Loans to Students Reform Bill
1989 The Student Loan Reconciliation Amendments
1990 The Omnibus Budget Reconciliation Act
Higher Education Amendments
  • Mandated sole use of a single, free application for Title IV funds (Free Application for Federal Student Aid, or FAFSA);
  • Mandated a single need analysis methodology, called the Federal Need Analysis;
  • Methodology (FM), and a single set of cost of attendance components;
  • Established a statutory definition of an academic year with a minimum number of hours and weeks;
  • Required pro-ration of Federal Pell Grants and Stafford Loans for undergraduate students enrolled in programs that do not meet the statutory definition of an academic year, as well as for undergraduate students enrolled in a remaining portion of an academic year;
  • Mandated development of a common FFEL application and promissory note, and a common form for processing FFEL deferments;
  • Mandated standardization in FFEL lenders and guarantor forms and procedures;
  • Required negotiated rulemaking for Part B (FFEL Program), Part G (General Provisions), and Part H (Program Integrity) of the Higher Education Act;
  • Changed the names of the loan programs. The Guaranteed Student Loan Programs had often been (and still are) referred to as the “Part B” Programs, because they are addressed in part B of Title IV of the Higher Education Act. The 1992 HEA renamed the Part B Loans as a group to the “Federal Family Education Loan Program” or the FFEL Program. The Guaranteed Student Loan Program itself was renamed the Federal Stafford Loan Program in honor of Senator Stafford;
  • Increased annual and aggregate loan limits while PLUS loan limits were eliminated;
  • Created a separate Federal Unsubsidized Stafford Loan Program for students who did not qualify for a subsidized loan, or whose subsidized eligibility was limited to borrow additional funds;
  • Authorized a new William D. Ford Federal Direct Loan Demonstration Program, designed to permit a small group of schools to offer loans similar to those under the Federal Family Education Loan Program and allowed the Department of Education to provide students loans directly through schools rather than through private lenders;
  • Changed the structure of loan limits under the Federal Perkins Loan Program;
  • Enhanced the purpose of the Federal Work-Study program by adding a community service requirement; and
  • Eliminated financial restraints on eligibility for less-than-half-time.
As a result of the 1992 HEA mandate for a free financial aid application and federal methodology for need analysis, there was no longer a need for the CSS financial aid application. Some institutions were philosophically opposed to the changes in need analysis adopted by Congress. For example, many opposed the decision to exclude home equity as a factor in determining ability to pay. As a result, CSS developed the Profile, a supplement to the government’s free application, which many private schools use to award private funding.
1993 The Student Loan Reform Act of 1993 made conforming adjustments to certain areas of the Federal Family Education Loan Program to comply with the Direct Loan Program. Legislation in 1993 repealed the Supplemental Loans to Students Program and increased limits on unsubsidized loans Congress also reaffirmed the use of professional judgment in the Federal Pell Grant Program.
Authorizations under section 443(b)(5) of the Higher Education Act of 1964, as amended (42 U.S.C. 2753(b)(5)), made it possible for the Secretary to allow an increase in the Federal share of compensation for FWS students to exceed 75%, if required in furtherance and purposes of the program. Effective with the “America Reads Challenge” of the 1997–98 award class=GramE>year, the Secretary waived the FWS institutional-share requirement for reading tutors of children from infancy through elementary school. Federal funding for FWS students working as reading tutors would be 100%.
The Tax Payer Relief Act established new tax credits were made available for higher education expenses including the HOPE Scholarship Tax Credit which gave up to $1,500 of credit for each of the first two years of college, and Lifetime Learning Tax Credits The law also allowed interest paid on qualified education loans to be tax deductible, taxpayers were allowed to contribute annually to an educational IRA for each child under 18, and penalty-free withdrawals from existing IRAs for higher education expenses were allowed. The act also allowed greater flexibility for families saving in qualified state pre-paid tuition plans, an income exclusion for up to $5,250 in employer education benefits, and tax-free loan forgiveness for certain community service.
Higher Education Amendments
Established Performance Based Organization (PBO) to improve student aid delivery system. President Bill Clinton signed into law P.L. #105-244, the Higher Education Amendments of 1998 on October 7, 1998. This legislation:
  • Raised the maximum authorized funding levels for the Federal Pell Grant;
  • Expanded eligibility by increasing the income protection allowances in the formulas used to determine a student’s eligibility;
  • Provided that students attending schools that lose their eligibility to participate in the FFEL or Direct Loan program because of high default rates are not eligible for Pell Grants; and
  • Extended Pell Grants to certain post-baccalaureate students who are preparing to teach.
In 1998–99, the Secretary added a waiver of the institutional-share requirement to extend to students employed as tutors in a family literacy program that provides literacy services to children from infancy through elementary school or to their parents or caregivers.
1999 America Counts. Effective, July 1999, the Secretary provided an additional waiver for students working as mathematics tutors for children who are in elementary school through the ninth grade. This waiver is an attempt to address the need to improve student achievement in mathematics. At this time, 36 percent of fourth graders and 38 percent of eighth graders score below the basic level in mathematics. The Third International Math and Science Study shows that, while U.S. students perform above the international average in mathematics at the fourth-grade level, by the eighth grade, relative performance is below the international average.
1McCormick, J.L. (1972). Journal of Student Financial Aid, 2.

2Brooks. NASFAA: The First Twenty Years, p. 12-13.

3McCormick, J.L. (1972). Journal of Student Financial Aid, 2.

4de Gruyter, W. (1992). American Universities and Colleges, 14th Ed.