The Federal Student Aid Program in a post-Department of Education world (updated 2 April 2025)
Ramifications and risks of the Executive Order to close the DOE
This is an initial assessment, not the last word, on the status and future of the Federal Student Aid programme; updates to follow as changes are announced
The White House Executive Order (EO) of 20 March 2025, “Improving Education Outcomes by Empowering Parents, States, and Communities,” lays out a rationale and process for elimination of the U.S. Department of Education (DOE), which among other things is responsible the Federal Student Aid programme—financial aid offered in the form of grants and loans. The language of the EO provides a deceptive argument for effecting changes to the programme; it also fails to acknowledge how the process established by the DOE for applying for student loans has been integrated into financial aid programmes by states and at U.S. Higher Education Institutions (HEIs) in general.
Since federal government departments can only be created or dissolved by an act of congress, it is not certain that the EO will ultimately lead to the DOE’s dissolution. It is clear, however, that the responsible cabinet Secretary, Linda McMahon, has been charged with downsizing staffing and to plan for the Department’s closure, essentially creating conditions whereby it can no longer achieve its legislative mandate. Changes will no doubt be forthcoming, and those changes carry significant risk.
On 21 March 2025, the day following the release of the EO, President Trump announced further that the administration of the DOE’s loan portfolio would be transferred to the Small Business Administration (SBA). On the very same day, it was announced that SBA intended to reduce its staffing by 43 percent. Although the SBA head, Kelly Loeffler, appears to have embraced the notion of managing the loan portfolio, the Department of Education remains the only government entity legally authorised by congress to do so.1
This essay briefly explains why the EO’s argument that the DOE is not fit to manage the federal student loan programmes is specious; it also identifies how the DOE’s “Free Application for Federal Student Aid” (FAFSA) has become indispensable to American colleges and universities nationwide. It then articulates some of the risks that proposed changes would introduce for both prospective and past recipients of student loans and academic financial aid generally.
Much of the work of the DOE’s loan programme is delegated to private-sector companies
The EO of 20 March 2025 lays out the rationale for changes to the federal student loan programme as follows:
The Department of Education currently manages a student loan debt portfolio of more than $1.6 trillion. This means the Federal student aid program is roughly the size of one of the Nation’s largest banks, Wells Fargo. But although Wells Fargo has more than 200,000 employees, the Department of Education has fewer than 1,500 in its Office of Federal Student Aid. The Department of Education is not a bank, and it must return bank functions to an entity equipped to serve America’s students.
The implication here is that the DOE is inappropriately staffed to manage the large portfolio of student loan debt, and that such debt would be more effectively managed by the banking sector. It fails to acknowledge that the Department already outsources most loan-serving activity to private-sector companies with which it finalised contracts in 2024 or earlier:2
Aidvantage: Operated by Maximus Education, handling direct and family education loans.
Education Computer Systems, Inc. (ECSI): General student loan management and CRM functions.
Edfinancial Services: Specialist inter alia in loan forgiveness and discharge.
MOHELA (Higher Education Loan Authority of the State of Missouri): A nonprofit organisation specialising in negotiation of repayment options.
Nelnet: A publicly traded for-profit company that manages borrower services and repayment plans.
Central Research, Inc. (CRI): A company handling payment processing, particularly for financially challenged clients.
The DOE only handles loan defaults internally by its Default Resolution Group.
The DOE does not, therefore, perform the “bank functions” that the EO asserts. Rather, it administers loans according to a model that would seemingly appeal to conservatives as it relies so thoroughly on private companies rather than government employees.
Even if loan legal barriers were eventually overcome and loan administration were ultimately assigned to the SBA, that agency could presumably be authorised to legally outsource loan servicing to the banking sector. This is a high risk proposition. Why?
Currently loans are funded directly by the Department of the Treasury and are administered through the DOE. Banks are profit-driven—they do not operate as a public service—and would require financial incentives to service loans beyond the fees currently paid to the financial services companies handling the loans. In other words, some means would need to be introduced to enable banks to profit from the activity. Incentives could involve, for example, relinquishing control of interest rates to the banks; allowing banks to determine loan repayment and forgiveness policies; and allowing banks, as stakeholders, to influence parameters for the award of student loans currently managed through the DOE’s FAFSA programme, etc.
In a more radical move, the government could transition capitalisation of the student loan programme from the U.S. Treasury to the banking sector—no doubt with changes in policy and application procedures, and assurances of a “light touch” regulatory framework. This, too, would require legislative action.
There is also the further practical risk that, during any transition period, there will be disruptions of service and loss of data that impact borrowers adversely. The likelihood of such problems is be heightened by the loss of current DOE staff whose experience and expertise enables efficient and successful oversight of a complex and critically important national function.
FAFSA - A cornerstone of college/university financial aid programmes, nationwide
Any family that applies for college or university financial aid is familiar with FAFSA—the Free Application for Federal Student Aid, a form available from the Federal Student Aid division of the DOE. A FAFSA form must be submitted to be considered for federal student financial assistance, which include Pell Grants (need-based grants for low-income students); direct subsidised and unsubsidised Loans; PLUS loans (for parents and graduate students); and the federal work-study programme. The DOE verifies and analyses information submitted in the FAFSA form and arrives at an “Expected Family Contribution” (EFC), which determines loan eligibility. If federal grants or loans are approved, the funds are generally disbursed directly to the applicable HEIs.
The EFC is used not just to determine eligibility for or amounts of federal student assistance. The analysis is made available to states, colleges and universities nationwide who use this information in determining kinds and amounts of additional sources of financial aid. The DOE also imposes conditions of compliance on HEIs who are the direct recipients of federal funds, including a requirement of reports of Satisfactory Academic Progress (SAP), Cost of Attendance (COA) calculations, verification of data pertinent to FAFSA, and other matters.
The Federal Student Aid programme has therefore created, with FAFSA, a standardised approach to determining financial need that serves its own internal purposes, but which has in effect led to standardised needs analysis across the entire U.S. higher education sector. Disruption of this analytical function through significant changes in policy, through changes in the kinds of aid offered through the DOE, or through re-assignment of core staffing functions within the government or private sector would would have broad national impact, disrupting and potentially fragmenting established procedures at HEIs and state scholarship programmes that provide financial aid.
Finally, it is unclear how management of the loan portfolio could be separated logically from DOE’s internal policy, assessment and compliance functions that relate to FAFSA and the existing national approach to college and university financial aid. This is not addressed in the EO or Trump’s later announcement of a future role of the SBA.
Loan portfolio management
An indicated above, the DOE makes use of external private companies to manage its extensive loan portfolio. These companies work under contract with the DOE and are subject to the same regulatory controls as the DOE.
An early sign of administration changes appears on the client-facing web pages of these companies. For example, on the Student Financial Aid website, the following notice has been posted as of mid-March 2025:
The U.S. Department of Education is reviewing the recent Executive Order regarding the Public Service Loan Forgiveness Program. The Program is not changing today, and borrowers do not need to take any action.
And Nelnet, a major servicer of student loans, has posted the following on its website:
A federal court issued an injunction preventing the U.S. Department of Education from implementing the Saving on a Valuable Education (SAVE) Plan and parts of other income-driven repayment (IDR) plans. As a result, the IDR and online loan consolidation applications are temporarily unavailable on StudentAid.gov.
At this time is is clear that the DOE is entering a period of change and instability, where the Student Financial Aid programme will likely be transformed in fundamental ways. Were loan management and servicing transferred to the private banking sector, whether through the SBA or not, the entire ecosystem that supports the costs of higher education would inevitably be transformed.
Conclusions
It is impossible at the moment to predict whether the government will retain its contracts with the companies that currently manage and collect repayments on student debt, or whether it will provide incentives to the banking sector to assume that role. But it is clear that there will be extraordinary risk if such changes transpire. Significant risks would also be incurred were the FAFSA process managed by the DOE were disrupted—and consequences would be felt nationwide by states and especially by American HEIs.
From the perspective of a loan recipient, prospective changes in policy toward loan forgiveness or terms of repayment could be difficult or even life-changing.3 For individuals who have received more than one form of loan assistance, it can already be confusing to even even know where those loans are serviced. For students seeking loans at this time or in the near future, it will be difficult to understand whether the loan terms and conditions currently in place will remain the same over the course of a three- or four-year period of university study.
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Regarding the SBA announcement, see also Katherine Knott’s brief report, “Trump’s Plan to Move Student Loans to SBA Raises Concerns,” Inside Higher Ed (21 March 2025) https://www.insidehighered.com/news/government/student-aid-policy/2025/03/21/small-business-administration-take-over-student-loans#:~:text=Beth%20Maglione%2C%20interim%20president%20of,doing%20so%20would%20take%20time. (consulted 23 March 2025)
“The Full List of Current Federal Loan Servicers 2025,” Student Loan Professor (3 January 2025) https://www.studentloanprofessor.com/federal-student-loan-servicers (consulted 23 March 2025)
The notion that effecting the administrative changes proposed in the EO and subsequently by the President could lead to a “breach of contract” between the loan-giver and loan-taker and therefore cancel repayment obligations surely belongs to the domain of wishful thinking. A lot of legal water and political screed will pass under the bridge before any fundamental changes to the Federal Student Aid programme fall into place.