The United States Department of Education, established in 1979, has a vital role in overseeing federal student loans in addition to overseeing numerous programs at the education level. Recently, discussions about eliminating the department have been made, and supposedly President Trump will be issuing an executive order in an effort to initiate such action. While Congress is the only one who can actually close the department, closing it would have a significant impact on millions of borrowers and students. This article explores the potential of what could occur to student loans if the Department of Education were to close.
Background on the Department of Education’s role within student loans
The Department of Education manages over $1.7 trillion in federal student loans, which are extended to almost 43 million borrowers. The department administers the disbursing, servicing, and borrower services of the loans through its Office of Student Aid. The department also administers income-driven repayment plans and loan forgiveness programs, among others, that assist borrowers in managing their debt more effectively.
Key programs managed by the Department of Education
- Federal student loans: Direct Loans, PLUS Loans, and Consolidation Loans.
- Income-Driven Repayment Plans: Plans that adjust monthly payments according to income.
- Public Service Loan Forgiveness (PSLF): Cancellation of public service borrowers.
- Pell Grants: Grants to students who are low-income.
Possible effect on student loans in case the Department of Education is shut down
If the Department of Education were to shut down by the President, federal student loan servicing might be transferred to another agency like the Treasury Department15. Transferring these loans might prove difficult and disruptive for borrowers. Officials caution that making such a change could result in delays and inefficiencies in servicing the loans, as the Treasury Department would have to sort out how to service a giant loan portfolio.
Disruptions in loan servicing
- Transition challenges: The Treasury Department would have massive logistics challenges in taking over the roles of managing student loans.
- Delays: The borrowers would be subjected to payment processing delays, changes in payment plans, or qualification for forgiveness programs.
- Staffing concerns: The transition could be hampered by staffing shortages, since the staff in the Education Department is already being cut.
Alternative management options
There are a few options proposed to manage student loans in the case of the elimination of the Department of Education:
- Treasury Department: As discussed, this is a probable option to manage student loans. In the past, however, experience has been such that direct management through the Treasury may not be as efficient as employing private contractors.
- State governments: Decentralization of education policy and restoration of powers to individual states is among the proposals. This may result in diversified policies and potentially decrease federal control.
- New government corporation: Among the proposals is the establishment of a new government corporation to oversee federal loans, underlining professional management and governance.
Impact on individual student loan programs
The shutdown of the Department of Education would impact different student loan programs differently:
- Income-Driven Repayment Plans: These can be ended or replaced with more demanding repayment terms.
- Public Service Loan Forgiveness (PSLF): The fate of PSLF can be uncertain, with possible changes to the eligibility for or extension of the program.
- Pell Grants: The Pell Grant program will likely persist, but its administration could be moved to a different agency.
The possible shutdown of the Department of Education also presents serious challenges to managing federal student loans. Although the loans would remain, the borrowers might experience a servicing halt and possible shift in repayment alternatives. Borrowers must be prepared and aware of any changes by revising their loan details and looking for viable repayment plans. Finally, the Department of Education and its mandate will be determined by legislative measures and other agencies’ capacity to take over its functions without a hitch.
Read more: Trump and Vance’s take on student loan forgiveness: “It’s a working-class issue”
