What Would Happen to Student Loans if the Department of Education Closes?

While such a move would require congressional approval, discussions have already begun about shifting its responsibilities—including the management of federal student loans—to other agencies. For financial aid professionals, understanding the potential implications of such a transition is crucial.

The closure of the Department of Education does not mean that federal student loan programs would disappear. According to Karen McCarthy, Vice President of Public Policy and Federal Relations at the National Association of Student Financial Aid Administrators, borrowers would still be responsible for repaying their loans. The federal student loan portfolio, currently valued at approximately $1.7 trillion, would likely be transferred to another federal agency, such as the Department of the Treasury, the Small Business Administration or a combination of agencies considering the technology and expertise required to maintain these programs.

However, transitioning such a vast loan portfolio would be complex and could cause significant disruptions for borrowers. Loan servicing platforms, repayment plans, and borrower assistance programs could all experience delays and inefficiencies. Financial aid professionals should prepare for potential challenges in helping students and alumni navigate these uncertainties.

If the Department of Education’s functions are reassigned, borrowers could face complications in managing their student loans. Recent workforce reductions, court filings, and executive orders targeting the Department of Education and its programs have already impacted key loan servicing programs. For instance:

• Income-Driven Repayment (IDR) Plans: Some of these plans have been temporarily closed to new applicants due to a court order, leaving many borrowers without access to repayment schedules tailored to their financial circumstances.
• Total and Permanent Disability Discharge Program: This initiative, which forgives loans for eligible borrowers with disabilities, has been paused due to a servicing transition. While it is expected to resume, ongoing federal staffing cuts could delay its reinstatement and the processing time related to each application.
  

Transferring student loan responsibilities to another agency could further complicate these issues, especially given existing concerns about loan servicer errors, inaccurate billing, and delays in processing relief applications.

What Financial Aid Professionals Can Do

In light of these developments, financial aid offices should take proactive steps to support borrowers:

1. Encourage Borrowers to Update Their Information: Students and alumni should ensure their loan servicers have their current contact details to avoid missing important updates.
2. Promote Enrollment in Repayment Plans: Borrowers should get into repayment plans that fit their long-term financial needs before any potential transition occurs. Inaction may only cause further issues, especially as the application windows are impacted by ongoing changes and litigation surrounding these programs
3. Monitor Legislative Developments: While the proposed closure of the Department of Education is uncertain, financial aid professionals should stay informed about policy changes that may impact loan management.
   

While discussions around the closure of the Department of Education continue, federal student loans remain a critical concern for borrowers and financial aid professionals alike. Accurate exit counseling and adequate support during the key transition periods that borrowers experience from graduation to repayment are key to the success of students and the ongoing maintenance of Cohort Default Rates by schools. By staying informed and advising students on best practices, financial aid offices can help mitigate potential disruptions and ensure borrowers remain on track with their repayment obligations.