How the Dismantling of the Education Department Could Impact Trillions in Student Debt: What You Need to Know

As Donald Trump plans to dismantle the Department of Education, there’s growing uncertainty about its financial arm, which oversees around $1.64 trillion in student loans. Current and former employees report that staff cuts and poor communication worsen the situation.

The financial side of the department is separate from its policy functions, which Trump aims to downsize or move elsewhere. He recently admitted that managing the enormous loan balance complicates plans to close the department entirely.

Trump hinted that federal student debt may transfer to other agencies, like the Treasury or the Small Business Administration. This raises questions about the government’s role in directly lending money to students.

The Heritage Foundation’s Project 2025 proposes creating a new agency to handle student loans, run by a Senate-confirmed leader and funded by Congress. This plan suggests the government would no longer directly issue loans but guarantee them through private lenders. The aim would be to treat taxpayers as investors.

Lindsey Burke, an economist with the Heritage Foundation, argues that when the government lends money for education, borrowers should be expected to repay it. Under this vision, old student loans would be managed by the Treasury Department, which would handle defaults and collections.

However, around 40% of current loans are delinquent. Missed payments hurt borrowers’ credit scores and push loans into default after a prolonged period without payment. Experts warn that a wave of defaults may be on the horizon as borrowers adjust to the end of a multi-year payment pause.

One former Education Department official expressed concerns about the upcoming challenges, calling it a “tidal wave” that is not just a possibility anymore.

In an effort to help borrowers stay on track with payments, the Education Department hired contractors to enhance communication and provide support. However, recent layoffs have left the department struggling to retain knowledgeable staff and resources.

Recent changes, including the cancellation of income-based repayment programs, have added to borrowers’ stress amid staffing shortages and customer service issues.

The Biden administration’s introduction of the “SAVE” plan aimed to ease the burden by capping payments at 5% of borrowers’ income. The plan has faced legal challenges, resulting in the Education Department taking down applications for income-driven repayment options from its website, leaving many borrowers without necessary support.

Nicolas Salem, a former analyst, found it difficult to manage his $25,000 student loan after losing his job. With no way to adjust his payments or reach his loan servicer, he’s now considering moving due to financial strain.

Recently, the Office of Federal Student Aid discussed possibly reinstating some income-based repayment plans, but the future remains uncertain as new legal challenges loom.

Individual borrowers face the prospect of higher payments under any new plans that survive legal scrutiny. Employees within the Education Department expressed doubt that the “SAVE” plan would return.

Colleges and universities must soon inform admitted students about aid packages, but uncertainty remains. With many knowledgeable staff having been let go, the department struggles to provide clear guidance during these changes.

Recent communications hinted at significant layoffs, with a quarter of the Student Aid division’s staff already gone. Further cuts may hinder the department’s ability to function effectively.

Concerns grow over the department’s capability to support borrowers amid looming layoffs and operational challenges. Colleen Campbell, an executive at the Federal Student Aid office, described the working conditions as “impossible” and voiced her worries for both staff and borrowers.

The backlash from the 2024 redesign of the FAFSA application serves as a warning about potential complications ahead. The rollout, which led to confusion and delays, highlights the problems that can arise from underfunding and staff shortages.

Experts like Michele Shepard Zambini stress that these staffing challenges could harm borrowers and applicants in the future, raising alarms about the department’s ability to manage student aid effectively.

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