Donald Trump has repeatedly campaigned on eliminating the Department of Education. While such a proposal plays well with some segments of the electorate, it leaves borrowers with a critical question: What would happen to federal student loans if the Department of Education were no more?
The quick answer: Your student loans aren’t going anywhere. The abolition of the Department of Education wouldn’t result in student loan forgiveness. Instead, student debt repayment could become even more burdensome. In fact, transferring federal loans to another department or the private sector for collections could make repayment more expensive and complicated for borrowers.
Let’s take a closer look at what eliminating the Department of Education could mean for federal student loans, drawing from both recent political developments and conservative policy proposals like Project 2025.
Sherpa Thought: The connection between Donald Trump and Project 2025 is a matter of some debate. The goal behind this article is to help borrowers understand what abolishing the Department of Education might mean for them. There is a lot of legal and practical uncertainty on this topic.
There is ample evidence to suggest a connection between Trump and Project 2025, but even if there isn’t a connection, Project 2025 provides a detailed conservative framework that the Trump campaign hasn’t yet provided.
Should clarifying details into the plan to eliminate the Department of Education become available, this article will be updated accordingly.
Structural Changes: Where Would Federal Student Loans Go?
When discussing the possibility of dismantling the Department of Education, it’s important to understand that student loans would still need to be managed somewhere. The likely candidate is the Department of the Treasury. But this shift wouldn’t be seamless, nor would it be favorable for borrowers.
Federal Debt Collection Moving to the Treasury
The most likely outcome of abolishing the Department of Education would be that federal loans would transfer to the Treasury Department. The Treasury, which already handles tax collection, would take over the role of debt collection for student loans. This could have serious consequences for borrowers.
Under Treasury control, loan servicing could become more aggressive. Instead of working with loan servicers overseen by the Department of Education, borrowers might face collection techniques similar to those used for unpaid taxes. This could involve garnishing wages or intercepting tax refunds more frequently, making repayment harsher for borrowers struggling with debt.
Additionally, in the short term, things would be confusing for borrowers. Any transition is typically accompanied by both new procedures and mistakes.
Privatization of Federal Student Loans
Another possibility is that student loans could be sold off to private debt collectors. This idea aligns with conservative policies going back to the Reagan administration, which advocated for reducing the federal government’s role in education. Project 2025, a conservative think tank proposal tied to Trump’s potential future administration, envisions moving federal student loan management to the private sector.
If loans were sold to private companies, borrowers could face even more aggressive repayment tactics. Private companies have a duty to shareholders to maximize profit, and they might impose arbitrary barriers to loan forgiveness programs or income-driven repayment plans.
Sherpa Thought: In the 2020 election cycle many Democrats campaigned on the idea of student loan forgiveness for all. It was an untested legal theory that we have since learned will not hold up in court.
The notion of selling federal student loans to private lenders appears at this point to fall in the same category. It isn’t immediately clear whether or not these loans could be sold. Thus far, they haven’t, and its never really been considered.
A future adminstration could try to push this boundary. For example instead of paying servicers to manage federal loans, they could get paid by servicers and allow the servicer to keep some or all of the principal and interest collected.
The Master Promissory Note: An Important — but Limited — Protection
Borrowers sign a Master Promissory Note (MPN) when they take out federal student loans. This contract with the government is supposed to protect borrowers from drastic changes to repayment terms. However, it’s efficacy has limits.
While it offers some protection, it’s unlikely to completely shield borrowers from the significant changes that could arise from eliminating the Department of Education. The terms of the MPN and what actually happens in practice can often be different.
A good example of this disparity is the Public Service Loan Forgiveness program. PSLF is guarenteed both by statute and by the MPN. However, when the first batch of borrowers applied for PSLF, the rejection rate was 99%. Thousands of borrowers though they were eligible for PSLF, but were rejected due to confusing red tape, and at times, misleading guidance from servicers. It was until Congress, the President, and the Department of Education made some changes that PSLF started working for borrowers.
Practical Consequences: Why Repayment Could Become More Difficult
Even if programs like Public Service Loan Forgiveness (PSLF) or Income-Driven Repayment (IDR) aren’t eliminated, they could become practically inaccessible or more challenging. Here’s why:
Barriers to Enrollment and Forgiveness
The early troubles with PSLF provide a template of what could go wrong for borrowers. PSLF wasn’t eliminated, but the process of qualifying became so difficult that it was practically out of reach for most borrowers. A similar situation could arise if federal loans are transferred to the Treasury or private debt collectors.
The entities managing your loans could impose arbitrary hoops to jump through, making it difficult for borrowers to get approved for IDR or forgiveness programs. These barriers could force many borrowers to give up and pay the full balance, even if they would otherwise qualify for forgiveness.
The added complexity of transferring loans to new servicers, whether government or private, could also cause delays and confusion. Borrowers might find themselves in limbo, unsure where to turn for help with their loans. Meanwhile, interest would continue to accrue, leaving borrowers worse off financially.
Increased Costs for Borrowers
With the potential transfer of loans to the Treasury or the private sector, borrowers could face higher costs overall. These cause could include late fees, higher bills from selecting the wrong repayment plan, and less debt getting forgiven.
Project 2025: A Glimpse into Trump’s Plans
While Donald Trump’s campaign hasn’t released detailed policy plans for student loans, Project 2025, a conservative policy proposal crafted by think tanks aligned with his administration, provides insight into what might happen.
Key Student Loan Proposals in Project 2025
- Privatizing Federal Loans: Project 2025 calls for restoring federal student loans to the private sector. This would include privatizing Parent PLUS, Graduate PLUS, and other federal loans. The goal is to allow market forces to influence educational borrowing, potentially leading to higher interest rates and more restrictive borrowing terms for students.
- No Loan Forgiveness: Under Project 2025, loan forgiveness programs would be significantly altered. The proposal suggests a new income-driven repayment plan that requires borrowers to pay 10% of their income above the poverty line. The propsal calls for eliminating IDR forgiveness via new legislation. However, if new legislation cannot be passed, forgiveness would come after 25 years.
- End of PSLF: Project 2025 explicitly calls for the termination of Public Service Loan Forgiveness, a program that they argue prioritizes government and public sector work over private employment. This aligns with the broader conservative goal of reducing federal support for public sector roles.
- Taxpayers as Investors: One of the key principles of Project 2025 is treating taxpayers like investors in federal student aid. The plan suggests that taxpayers should expect a return on their investment, meaning borrowers would be expected to repay their loans in full, with no interest rate subsidies or forgiveness.
Can Trump Actually Do This? The Role of Congress and Executive Power
While Trump could use executive power to begin dismantling the Department of Education, significant changes to federal student loans would require Congressional approval. This makes the political landscape critical to any potential changes.
What Could Be Done via Executive Action?
Some changes, like moving loan management or weakening the Department of Education, could be done through executive orders. However, completely abolishing the Department and enacting sweeping changes to loan programs would likely require legislation getting passed in Congress.
It’s also important to note that even if the Department is weakened or gutted by executive action, the changes could create confusion and delays, affecting borrowers in the short term.
Congress: The Deciding Factor
If Trump were to push for the abolition of the Department of Education, he would need the support of Congress to pass the necessary legislation. This could be a tall order, especially in a divided Congress. The ability to enact sweeping changes will depend on the political composition of the House and Senate.
Conclusion: Uncertainty Ahead for Borrowers
While the idea of abolishing the Department of Education might sound like a bold political move, the reality for borrowers would likely be more complicated and costly. Federal loans aren’t going away, but repayment could become more expensive and less accessible. The transfer of loans to the Treasury or new servicers could lead to harsher collection tactics, fewer repayment options, and increased costs for borrowers.
As with any major policy proposal, it’s important to remember that what a candidate promises and what actually happens can be very different. Whether Trump or another future president moves forward with this plan, federal student loan borrowers should be prepared for uncertainty and challenges ahead.
Final Sherpa Thought: The decision to publish this article was a difficult one. There are many questions at this point without concrete answers, which opens the door to speculation. Making guesses without knowing all the facts is often a bad idea.
Ultimately, the decision to move forward with publication was based on my desire to shed some light onto a topic that hasn’t gotten much attention.
If you have thoughts that you think should get added to this conversation, please let me know in the comments below or send me an email.
What a roller coaster. Crazy that we will be thinking of maybe selling our house and rent if this all goes sideways and IBR/PSLF dies. Will be “interesting” Eaton popcorn and waiting on the sidelines saving cash for whatever drops.
Setting aside cash to prepare for whatever comes next is a really good idea. Especially with high yeild savings accounts still offering a pretty good interest rate.