What dismantling Education Department means for student loans
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Illustration: Maura Losch/Axios
Editor's note: The Small Business Administration will handle the nation's student loan portfolio, President Trump announced Friday.
President Trump signed an executive order to close down the Department of Education on Thursday — an unprecedented move that presents big questions for student loan borrowers.
Why it matters: The department plays a key role in managing some $1.5 trillion in student debt for more than 40 million borrowers, and a vast majority of its budget is allocated to the agency that oversees the federal student loan system.
- Even before abolishing the department, the Trump administration blocked student loan forgiveness and repayment plans, slashed department staffing, and wiped the federal watchdog agency tasked with overseeing student loan servicing and collections.
Yes, but: A move to completely abolish the Education Department will likely face legal opposition because eliminating a federal department requires an act of Congress.
- However, the administration can cut key funding in the meantime.
State of play: If the department is shuttered, duties — including managing federal student aid responsibilities — would need to be shifted to another agency.
- "The Department of Education is not a bank, and it must return bank functions to an entity equipped to serve America's students," the executive order says.
- Although it's not immediately clear which entity would take over, proposals include transferring student loans to agencies like the Treasury or the IRS or potentially even to the states.
- During the transition, there could be slower processing times for loans, applications and payments and the potential for more administrative errors.
- While it's possible there could be a pause in borrowers' payments for a period, they would still eventually be due.
What they're saying: Betsy Mayotte, president of The Institute of Student Loan Advisors, told Axios before Trump's order that she wouldn't be surprised if the transition period doesn't affect borrowers too much.
- "I wouldn't be surprised even if they kept the same servicers that they have contracts with already to manage the loan," Mayotte said.
Zoom in: Pell grants, subsidized loans and work-study grants are mostly congressionally appropriated. While the Education Department manages them, it would take an act of Congress to get rid of them.
- So if the department shutters, these too would need to be managed by a different agency but wouldn't necessarily go away.
- Other income-driven repayment plans, like Public Service Loan Forgiveness (PSLF) and Income-Contingent Repayment, would also be difficult to remove because they require an act of Congress.
- But the administration in recent weeks made changes to repayment plans, including halting access to income-driven repayment plans. And amid ongoing legal challenges, borrowers are now unable to pursue PSLF.
- The SAVE plan, meanwhile, which was implemented by the Biden administration as an income-driven student loan repayment plan, was already in legal jeopardy and faces an uncertain future.
Zoom out: If federal student borrowing is put in jeopardy, some may turn to private loans.
- While private loans aren't necessarily more expensive, they're similar to applying for a personal loan or mortgage in that credit score, debt and income will determine the interest rate a borrower is offered and whether they qualify, NerdWallet's lending expert Kate Wood told Axios before the executive order was issued.
- With federal loans, the interest rate is determined by the year the loan originated, not by the characteristics of the borrower. Everyone gets the same terms.
- There are no student debt forgiveness programs with private loans, and income-based repayment options are not guaranteed.
Between the lines: "It's possible some borrowers would simply decide they can't afford college or don't want to deal with borrowing," Wood said.
- "With federal student loans, access is easy. All you need to do for consideration is file the FAFSA," she explained. "With private loans, you need to find the lenders, complete the applications, compare the terms — all the work is put onto the borrower."
- To borrow the full amount needed, a borrower may need to work with multiple private lenders, Wood noted.
The bottom line: There is a lot of uncertainty about what's going to happen.
- "If you're a current federal borrower and you're concerned, the best proactive step is to save your information," Wood advised.
- Go to studentaid.gov and screenshot or download your repayment history, she added.
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