US Secretary of Education Linda McMahon attends the International Women of Courage Awards Ceremony at the State Department in Washington, DC, on April 1, 2025.
Brendan Smialowski | Afp | Getty Images
When the U.S. Department of Education announced this week that it would transfer much of its programs to other agencies, it didn’t appear that the country’s federal student loan portfolio would be impacted.
However, financial aid experts and consumer advocates are still worried for borrowers.
More than 40 million Americans hold student loans, and the outstanding debt exceeds $1.6 trillion.
“What is concerning is the destabilization of the Department of Education and Federal Student Aid at the very moment when consistent, technically skilled oversight is most needed,” said Carolina Rodriguez, director of the Education Debt Consumer Assistance Program in New York.
The major overhaul of the agency is occurring at an especially challenging time for the federal student loan system. More than 5 million people are in default on their education debt, and President Donald Trump’s One Big Beautiful Bill Act eliminates several long-standing affordable repayment plans and relief options.
“Student loan eligibility and repayment involve multiple systems working together, and institutions need that process to be seamless, current and accurate,” said Melanie Storey, president and CEO of the National Association of Student Financial Aid Administrators. “As the delivery of other programs moves to other agencies, these dependencies must be carefully considered.”
On Tuesday, Trump administration officials said they had signed agreements with four federal agencies, including the departments of Labor and Health and Human Services, to start managing programs currently under the Education Department.
The move is part of Trump’s directive to dismantle the agency, experts said. Education Secretary Linda McMahon has argued that the recent government shutdown proved that the department is not needed.
Earlier this year, the Trump administration laid off nearly half of the Education Department’s staffers.
“They are attempting to hollow out the U.S. Department of Education, leaving behind a shell of the original organization,” said higher education expert Mark Kantrowitz.
Privatization concerns
The Trump administration’s goal of hobbling the Education Department will be difficult while the agency still oversees the massive federal student loan portfolio, experts say. But it may be trying to offload the debt.
The new restructuring at the Education Department doesn’t involve the loans, but Trump officials are exploring options to sell some of the debt to the private market, Politico reported in October.
Student loan borrowers have faced even more problems in the private market than with the government, consumer advocates said. When private companies played a bigger role in federal student lending in the past under the Federal Family Education Loan, of FFEL, program, Rodriguez said, “borrowers saw their debt balloon with no end in sight due to loan mismanagement.”
Any major loan transfer “will also result in errors that could harm borrowers and push relief further out of reach,” said Aissa Canchola Banez, the policy director at Protect Borrowers.
Currently, private lenders account for 8% of all student loans but are the subject of more than 40% of student debt complaints to the Consumer Financial Protection Bureau, lawmakers recently wrote in a letter to Trump officials.