What Would Happen to Student Loans if the Department of Education Were Reduced or Abolished?

In the coming year, it is anticipated that millions will begin repaying their student loans according to the initial agreements made.

President Joe Biden’s Saving on a Valuable Education (SAVE) initiative remains on hold following two federal court rulings. SAVE was designed to facilitate income-driven repayment options and offer debt relief.

The start of monthly repayment responsibilities will be postponed until after December, at which point the Trump administration will reveal its strategy for higher education lending.

However, before that, Trump and Congress may consider reducing the size of the U.S. Department of Education and transferring some responsibilities, including the management of over $1 trillion in federal student loans, to other departments.

Mark Kantrowitz, a noted author and member of the editorial board for the Journal of Student Financial Aid, expressed that relocating the management of student loans and financial aid functions to the Department of the Treasury could be relatively straightforward.

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Nonetheless, Kantrowitz noted that the Treasury may be less effective when it comes to collecting overdue loan payments.

He believes that the original loan terms agreed upon by borrowers will persist unless legislative changes are made.

Federal student loans typically have lower interest rates and fewer limitations compared to private loans from banks.

Kantrowitz remarked that private lenders are generally uninterested in assuming the federal government’s role in financing higher education and that attempts to privatize this function could result in a loss of public support, ultimately making college more expensive.

“Private lenders don’t have the appetite for doing that,” Kantrowitz relayed to The Epoch Times, adding that the federal government is unable to recoup tax dollars for loans dispensed under Biden’s initiatives.

The federal student loan debt, affecting 42.7 million borrowers, remains at $1.69 trillion.

Students at public universities typically borrow about $31,960 for a bachelor’s degree program.

As of the final quarter of 2024, nearly 5 percent of federal student loan dollars were reported as being in default, notes the Education Data Initiative website.

Linking Loans to Earning Potential

Kantrowitz stated that without new legislation, eligibility criteria for federal student loans will likely remain unchanged.

Suggestions have been put forth to restrict borrowing limits based on the type of degree (associate’s, bachelor’s, or advanced), part-time versus full-time student status, and even the relevance of study programs in relation to job market demands.

For instance, a nursing graduate may start earning between $60,000 to $70,000, while high-earning opportunities in the humanities are considerably more uncertain.

Similarly, the loan amounts available for students enrolled in MIT’s School of Engineering would exceed those for a community college student majoring in art appreciation.

“It’s a reasonable first step,” Kantrowitz added.

No new announcements have been made regarding the existing Public Service Loan Forgiveness program, which is designed specifically for emergency responders and military personnel.

Innovative Approaches to College Financing

Legislators are expected to explore additional modifications to higher education financing in the near future.

This legislation would also phase out the current PLUS program, which currently lacks a cap on loan amounts and has posed financial challenges for low-income graduate students.

Preston Cooper, a senior fellow at the American Enterprise Institute, argued that reforms to the federal student loan and financial aid systems are necessary to align with trends in higher education, especially when the cost of post-secondary education in the U.S. is twice that of other Western countries.

Since 2010, college enrollment has decreased by 12 percent, with approximately 60 percent of students completing their bachelor’s degrees within six years. In contrast, a two-year technical or vocational degree obtained from a community college is proving to yield a better return on investment.

“I would characterize it as a spending issue,” Cooper commented during a House Committee on Education and the Workforce hearing on February 5. “Underlying costs are a concern.”

Linda McMahon, Trump’s nominee for secretary of education, supports the expansion of Pell Grants for low-income students to encompass short-term certificate programs.

As per current standards, Pell Grants are applicable only to academic programs that last 15 weeks or longer, even though many vocational certificate programs offered at community colleges tend to be eight weeks or shorter.

Kantrowitz indicated that this expansion would necessitate a substantial increase in funds for the already underfunded Pell program, estimating a need for $2.7 billion to address current demands.

“The worry is that this would divert resources from the needs of the traditional Pell program,” he expressed.

Many community colleges across the U.S. have chosen to withdraw from federal student loan programs because Pell Grants often cover the majority of tuition fees, according to Kantrowitz.

Nevertheless, some institutions are facing challenges with fraudulent students who attend classes just to qualify for the grant before dropping out and using the funds for personal expenses.

“One can flunk out and still benefit from it,” he noted. “Pell runners are indeed a problem.”