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Posted at 6:00 AM ET, 04/23/2008

Hillary's 'two percent' college loan

By Michael Dobbs

State College, Pa., April 20, 2008.

"I went to law school [and] borrowed money from the federal government at two percent interest. I bet there are some people here who remember that. There was a program called the National Defense Education Act. Our government invested in young people."
--Hillary Clinton, Pennsylvania State University, April 20, 2008.

Hillary Clinton has been painting a halcyon picture of her days as a Yale Law School student between 1969 and 1972, and how easy it was back then for students to borrow money from the federal government. She drew a collective groan from 1,500 Penn State students over the weekend when she recalled how she was able to borrow money at two percent interest to complete her law school studies. But student interest rates were not quite as low in 1969 as Clinton has claimed--and not everybody could get them.

The Facts

Passed in response to the Soviet launching of Sputnik, the National Defense Education Act of 1958 enabled colleges and universities to offer low-cost loans to graduates and undergraduates. The interest rate was set at three percent a year, a rate that was still in force when Clinton attended Yale Law School, according to a 1972 study by Bruce Johnstone titled "New Patterns for College Lending." By the early 70s, the fund had grown to around $290 million, benefiting 455,000 students.

While the loan terms were very attractive, they were not available to everybody, said Pat Smith, an expert on the history of student aid who now serves as a consultant for the American Association of State Colleges and Universities. "Not everybody who was needy got one of these loans. The elite institutions were better at getting the money because they had financial aid administrators who knew how to hustle for it." According to Smith, local community colleges and the less well-known public four-year institutions tended to get left out of the process.

The program proved costly for the government because it required a large amount of fixed capital and was administered by academic institutions who were good at handing funds out, but not so good at ensuring that they were repaid on time. "There were big defaults, and all kinds of loans that were made badly," said Smith. In the 70s, the program was largely superseded by guaranteed student loan programs that benefited much larger groups of students.

Another student loan program, cited by the Clinton campaign in response to questions about Clinton's Yale student loans, is the Guaranteed Student Loan program of 1965. Interest rates under this program were significantly higher than under the NDEA program. According to the Johnstone study, they stood at 7 percent per year in 1972.

Clinton has promised to pour $8 billion a year in new funds to make college more affordable, including an expanded tuition tax credit, bigger Pell grants, more aid for community colleges, and winding down the guaranteed student loan program.

The Pinocchio Test

Hillary Clinton was fortunate to obtain a NDEA loan to help finance her studies at Yale Law School. But she is painting a glossier-than-warranted picture of the federal student aid program when she went to law school. Interest rates were higher than she remembers.

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By Michael Dobbs  | April 23, 2008; 6:00 AM ET
Categories:  1 Pinocchio, Candidate Watch, Education, History  
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