What Happens to Student Loans If Department of Education Is Downsized or Eliminated?

Some students may be blocked from accessing student loans. Gareth Fuller/PA

By this time next year, millions of borrowers could be expected to repay student loans under the original terms agreed upon.

President Joe Biden’s Saving on a Valuable Education (SAVE) program remains halted by two federal court decisions. SAVE had provided arrangements for income-contingent repayments and debt forgiveness.

SAVE recipients were informed last month that they are currently in a state of forbearance, where interest will not accrue.

Monthly repayment obligations will be delayed until after December, at which point President Donald Trump’s administration will announce the protocol for higher education lending.

Before then, however, Trump and Congress might downsize the U.S. Department of Education and reassign some of its functions, including the administration of $1 trillion-plus in federal student loans, to other departments.

Mark Kantrowitz, an author and editorial board member of the Journal of Student Financial Aid, said moving student higher education loans and financial aid functions to the Department of the Treasury would be relatively seamless.

Still, he believes the Treasury would be less effective with collection efforts on delinquent loan repayments.

Kantrowitz expects that the terms of loans borrowers originally signed off on will remain in place unless Congress makes changes.

Federally backed student loans have lower interest rates and fewer restrictions than private bank loans.

Kantrowitz said private lenders have little interest in taking over the federal government’s role in financing higher education, and elected leaders would lose public support for privatizing that function and making a college education even more expensive.

“Private lenders don’t have the appetite for doing that,” Kantrowitz told The Epoch Times, adding that the federal government can’t recover the federal tax dollars for loans previously satisfied under Biden’s initiative.

The current outstanding federal student loan debt for 42.7 million borrowers is $1.69 trillion.

The average federal student loan balance is $38,375, while the average loan balance factoring in both types of loans (federal and private) is about $41,500, according to the Education Data Initiative website.

The average public university student borrows $31,960 to cover a bachelor’s degree program.

Nearly 5 percent of federal student loan dollars were in default in the last quarter of 2024, Education Data Initiative’s website notes.

Basing Loans on Earning Potential

Kantrowitz said eligibility guidelines for federal student loans will also not change without legislation.

Proposals exist to limit borrowing amounts based on degree types (associate’s, bachelor’s, or advanced degrees), part-time versus full-time status, and even programs of study compared to labor market demands.

For example, a nursing program graduate can command a starting salary of $60,000 to $70,000, but high-wage prospects in the humanities are much less certain.

Likewise, loan amounts for a student in Massachusetts Institute of Technology’s School of Engineering would exceed that which covers a community college art appreciation major.

“It’s a reasonable first step,” Kantrowitz said.

No new changes have been announced for the existing Public Service Loan Forgiveness program, which predates SAVE and is specifically for emergency responders and military personnel.

New Ideas for Financing College

Other changes to higher education finance will be considered by lawmakers in the months ahead.

The College Cost Reduction Act proposes to pressure schools to reduce administrative costs, ease the process of transferring credits between schools, and provide students marketable credentials for work completed should they have to drop out, according to a House Committee on Education and the Workforce webpage.

The legislation would also sunset the current PLUS program, which has not set a limit on loan amounts and has been financially debilitating to low-income graduate students.

Preston Cooper, a senior fellow for the American Enterprise Institute, said changes to the federal student loan and financial aid system are needed to keep up with higher education trends at a time when post-secondary education in the United States costs twice as much as in other Western nations.

College enrollment has declined 12 percent since 2010, about 60 percent of students complete a bachelor’s degree within six years, and a two-year technical or vocational degree from a community college is proving to be a better return on investment.

“I would say it’s a spending problem,” Cooper said during a Feb. 5 House Committee on Education and the Workforce hearing. “Underlying costs are an issue.”

Linda McMahon, Trump’s nominee for secretary of education, advocates for expanding Pell Grants for low-income students to include short-term certificate programs.

Under the current guidelines, Pell applies to academic programs that are 15 weeks or more, even though many vocational certificate courses of study offered at community colleges are eight weeks or less.

Kantrowitz said that expansion would require a significant funding boost to an already underfunded Pell program. He estimates that Pell needs $2.7 billion to keep up with the existing needs.

“The concern is it would take money away from [traditional] Pell program needs,” he said.

Many community colleges across the country have opted out of federal loan programs because Pell Grants can cover most tuition costs, Kantrowitz said.

However, some schools are dealing with fraudulent students who attend class just enough to receive the grant before dropping out and spending the cash.

“You can flunk out and live off of it,” he said. “Pell runners are a problem.”