In a surprising turn of events, President Trump announced today that the federal student loan portfolio will be transferred from the U.S. Department of Education to the Small Business Administration (SBA). This unexpected decision comes just a day after an executive order declared that federal student loans would remain under the Department of Education. The sudden shift has sparked confusion, but in hindsight, there were subtle Easter egg hints that such a move might have been in the works.
Here’s what we know so far, what this change could mean for borrowers, and what to anticipate in the coming months.
The Federal Student Loan Portfolio
The federal student loan portfolio exceeds $1.6 trillion, making it one of the largest loan portfolios in the U.S. Today's announcement has created confusion as it directly contradicts parts of yesterday's executive order, which outlined plans to dismantle the U.S. Department of Education. Yesterday's order stated that federal Pell Grants and student loans would remain under the Department of Education. And today, we were told of the decision to move those federal student loans to SBA. But yesterday's executive order hinted that changes could be coming to federal student loans.
The executive order highlighted the Office of Federal Student Aid's lack of resources to effectively manage a portfolio of this magnitude. To illustrate the challenge, it compared the Department of Education's 1,500 staff members overseeing federal student aid to Wells Fargo’s 200,000 employees managing a similarly sized portfolio.
The latest development shifts responsibility for servicing federal student loans to the SBA. However, key details remain unclear, including when the SBA will take over—whether at the point of certification of the loan funds, or after the disbursement of loan funds.
From Federal Student Aid to SBA
Federal student loans have always been more than just funds disbursed and collected. Managing a portfolio of this magnitude requires specific expertise, infrastructure, and policies to ensure accountability and compliance with federal law.
Prior to this move, there had been rumors that the federal student loan portfolio may be moved to the Treasury. But looking back, when President Trump selected Linda McMahon as Secretary of Education, maybe we should have taken that as a hint. McMahon had served as Administrator of the SBA in his previous administration. The selection of McMahon as Secretary of Education may have indicated that the Trump administration was linking the SBA with the future of the federal student loan portfolio.
President Trump has promised that the SBA will offer better servicing for federal student loans. However, critics are already pointing out that this move comes just as the SBA faced a 40% reduction in its workforce.
President Trump has appointed Kelly Loeffler at the SBA to lead the federal student loan portfolio efforts, but further details about how the SBA will take on this responsibility remain unclear.
About SBA Loan Programs
The SBA isn’t new to managing federal loan programs. You might be familiar with its programs, especially during the COVID-19 pandemic, such as the Paycheck Protection Program (PPP) and the Economic Injury Disaster Loans (EIDL).
The SBA also offers other federal loans to small businesses for startup costs and working capital. Unlike the Direct Loan program, the SBA relies on private lenders that issue these loans with a federal guaranty. This model is reminiscent of the old Federal Family Education Loan (FFEL) program, which also relied on private lenders, and offered a federal guaranty on the loans. The FFEL program was discontinued in 2010 in favor of the current Direct Loan program, which the funds are directly drawn from the U.S. Treasury. However, could this be a hint about the future?
Student Loan Borrower Concerns
Here’s the big question looming over borrowers’ heads, how will this change impact my student loans.
Currently, there are more questions than answers. Federal student loans operate within a complex and interconnected system. At a high level, the process involves school participation, processing FAFSA applications, determining aid eligibility, disbursing funds to schools, and monitoring loans throughout repayment. Transitioning this portfolio would require either restructuring the entire system or transferring it as-is—both options are likely to present challenges for borrowers along the way.
Some critical unknowns include:
- When will the transfer happen? While the president indicated this will happen immediately, it's unclear how quickly it can happen.
- What happens to repayment? The terms and conditions of existing federal student loans will not change. Since many of these provisions are established by law, altering them would require an act of Congress. Furthermore, borrowers entered into a legally binding agreement through the Master Promissory Note, which raises potential legal concerns regarding the transfer of these loans.
- How will the SBA staff prepare? Federal student loans come with their unique regulations and policies. There’s no word yet on how the SBA plans to train its team on these specialized requirements, or if staff will move from the U.S. Department of Education to the SBA.
Borrowers should stay vigilant and monitor communications from loan servicers for updates.
What to Expect Next
Legal challenges. Moving the federal student loan portfolio from the Department of Education to the SBA raises fundamental legal questions. By law, federal student loans fall under the authority of the Department of Education and its Secretary. There haven’t been any proposed legislative changes to transfer these responsibilities to the SBA. This could spark lawsuits from borrowers, advocacy groups, or states who believe this move violates federal law.
Additionally, we expect logistical hurdles. Transitioning the $1.6 trillion loan portfolio will require synchronizing systems, maintaining compliance, and ensuring borrowers don’t face disruptions.
Despite these challenges, the administration seems determined to move forward, and borrowers, schools, and financial aid professionals will need to adapt.
Stay Tuned
This decision by President Trump has left many questions unanswered and borrowers uncertain about their future. While the SBA has experience managing loans, the size and complexity of federal student loans is an entirely different challenge.
We’ll be monitoring updates on this story. Borrowers and stakeholders are encouraged to keep a close watch on official communications for the latest developments.
For now, it’s best to prepare for potential changes and stay informed about how this transition could impact you.