Trump Administration Moves to Dissolve Education Department: What It Means for Your Student Loans?

TradingKey - On Tuesday, the Trump administration announced that the Education Department has signed a series of interagency agreements, transferring several core functions to federal agencies such as the Department of Labor and the Department of the Interior, in a move aimed at completely dismantling this federal agency.

For decades, the Education Department has served as the primary executor of educational policy — from civil rights enforcement to special education support and student loan management. Now, its largest grant programs and regulatory responsibilities are being redistributed.

White House spokesperson Liz Huston stated plainly: “The Trump Administration is fully committed to doing what’s best for American students, which is why it’s critical to shrink this bloated federal education bureaucracy while still ensuring efficient delivery of funds and essential programs.”

However, unions representing educators nationwide have expressed contrasting concerns. They argue that this shift will exacerbate confusion across the education system and further erode public trust in federal oversight.

This reorganization didn’t come without warning. In March of this year, Trump signed an executive order initiating procedures for dismantling the Education Department and cutting nearly half its workforce. 

“They are attempting to hollow out the U.S. Department of Education, leaving behind a shell of the original organization,” said higher education expert Mark Kantrowitz.

So what does this mean for student loan borrowers like you? As management oversight changes hands on a $1.6 trillion student loan portfolio, your repayment plans and forgiveness programs could face significant adjustments.

(Source: Freepik)

The Trump administration is actively advancing its restructuring plan for the U.S. Education Department. On Tuesday, officials announced six newly signed interagency agreements, marking the largest transfer of responsibilities in the department’s 45-year history.

According to the latest announcement:

• The Labor Department will assume responsibility for most of the Education Department’s higher education programs, including student success initiatives and grant programs supporting Historically Black Colleges and Universities (HBCUs) as well as other Minority-Serving Institutions (MSIs).
• The Health and Human Services Department will manage family support initiatives for students and programs related to foreign medical school accreditation.
• The State Department will take over the administration of Fulbright-Hays scholarships and grants managed by the Office of International and Foreign Language Education.
• Indian education programs and tribal college initiatives will be transferred to the Interior Department.

Education Secretary Linda McMahon described these moves as “a bold action to break down federal education bureaucracy and return control to the states.” Since spring, hundreds of employees have been laid off or offered early retirement packages, in an effort to demonstrate that America’s education system can function without a standalone federal agency.

In defending her push to phase out the Education Department entirely, McMahon increasingly points to what she views as decades-long shortcomings. She argues that over its 45-year existence, the department has grown into a bloated bureaucracy while student performance has continued to lag.

McMahon’s ultimate goal is full dissolution—transferring significant funding authority back to individual states so they can reallocate what are currently restricted-use educational resources. These include literacy programs and services for homeless students. Her proposal faces formidable challenges: many core departmental responsibilities—such as civil rights enforcement and special education funding—enjoy longstanding bipartisan support in Congress, which would have final say over any legislative changes required for such restructuring.

“Breaking apart the Department of Education and moving its responsibilities elsewhere will only create more confusion for schools and colleges, deepen public distrust, and ultimately harm students and families,” according to the local chapter of the American Federation of Government Employees.

For now, yes. The Office of Federal Student Aid (FSA) continues managing its $1.6 trillion federal student loan portfolio under the authority of the Education Department.

However, this arrangement may be temporary. Trump administration officials have consistently voiced their desire to shift management responsibilities for student loans over to entities like the Treasury Department or Small Business Administration (SBA).

That said, any such move would require Congressional approval since executive powers alone cannot unilaterally change statutory oversight governing student loan programs. As a result, officials are proceeding with incremental restructuring—downsizing workforces, rebalancing budgets, reallocating functions—in hopes of gradually weakening departmental infrastructure from within.

During this transitional phase:

• Pell Grants and federal loans continue to be disbursed on schedule.
• FAFSA remains open and fully operational.
• Postsecondary accreditation systems are functioning normally; institutions remain eligible for federal funding based on compliance.
• Civil rights enforcement efforts continue under current mandates protecting students from discrimination.

A key area drawing concern involves support services for disabled students. While still under departmental control at present—including grant administration tied to special education support along with civil rights investigations into violations affecting disabled learners—McMahon has proposed shifting these functions over to HHS or even DOJ (Department of Justice).

This proposal has sparked unease among disability advocates who argue that cross-agency coordination could interrupt critical services or reduce accountability during this delicate transition period.

(Source: Freepik)

Since President Trump signed an executive order in March to initiate the restructure of the U.S. Education Department, clear stress points have emerged within the nation’s student loan management system.

In his directive, the President highlighted that while the Department manages a $1.6 trillion federal student loan portfolio—comparable in size to Wells Fargo—it is staffed with significantly fewer personnel than a financial institution of similar scale. Following this order, Secretary of Education Linda McMahon launched a sweeping round of layoffs which resulted in nearly 2,000 employees leaving the department—about half its total staff. The Office of Federal Student Aid (FSA) was among those most affected.

Recent data shows that systems handling income-driven repayment (IDR) plan applications were temporarily shut down earlier this year, at one point leading to a backlog exceeding 2 million cases. While some progress has been made, by fall there were still over 1 million unprocessed applications waiting for review.

More troublingly, Public Service Loan Forgiveness (PSLF) Buyback program applications experienced a backlog increase exceeding 50% in 2025 projections, with more than 70,000 pending applications. Some borrowers may now face wait times stretching over a year before receiving decisions.

Currently, more than 42 million Americans owe an estimated $1.7 trillion in student debt. However, FSA’s complaint management infrastructure is now near collapse: both its feedback system and ombudsman team are severely undermanned or overwhelmed. The ombudsman group alone has over 27,000 unresolved complaints—meaning that when borrowers encounter problems with their loans, access to official support channels has become extremely limited.

Meanwhile, major technical glitches arising from recent system updates have plagued programs like Total and Permanent Disability Discharge (TPD), which offers relief for borrowers who are medically unable to work, further jeopardizing support for vulnerable individuals.

Relief initiatives designed for victims of educational fraud—such as those outlined under the Sweet v. Cardona settlement agreement—are also seriously delayed in execution. The Department has been forced to request extensions from federal courts due to implementation bottlenecks. A key hearing scheduled for December may directly affect thousands currently awaiting debt discharge under these provisions.

While Tuesday’s official statement did not explicitly address the ultimate destination of the government’s student loan portfolio, you should note that according to an October Politico report, government officials are actively exploring the possibility of selling portions of federal student debt to private markets.

This potential shift implies that if the Education Department fails to successfully transfer student loan operations to other federal agencies, the Trump administration may turn to an alternative solution—selling these loans to private companies. Regardless of the path taken, you as a borrower may continue to feel the tangible impacts of policy changes.

Daniel Zibel, chief counsel at the National Student Legal Defense Network, called this concept a “complex and unprecedented” fundamentally the reverse of the government’s acquisition of private loans during the 2008 financial crisis.

“The system for student debt is incredibly complicated, and for the administration to do this in a way that lives up to the protections that exist in the law for student loan borrowers makes it even more complicated,” Zibel said.

Selling them off now, he said, would shift repayment and management responsibilities to private entities, raising questions about enforcement, oversight, and the continuity of borrower protections. It could also eliminate the government’s power to cancel the loan.

Senator Elizabeth Warren of Massachusetts, joined by over 40 Democratic colleagues, issued a stern warning to Education Secretary Linda McMahon and Treasury Secretary Scott Bessent, demanding an immediate halt to all privatization negotiations.

"This sale would be a giveaway to wealthy insiders at the expense of working-class borrowers and taxpayers," Warren emphasized in the joint letter. History shows that when Wall Street gains taxpayer assets, ordinary families always end up as the losers.

It must be clear, however, that a transfer of management authority does not eliminate your legal obligations. Regardless of which agency manages your loans, your repayment responsibilities remain intact. All statutory forgiveness programs—including Income-Driven Repayment (IDR) plans, Public Service Loan Forgiveness (PSLF), and disability discharges—will remain available on paper.

• Organize and Back Up All Loan Documents

Immediately download and securely save complete repayment histories, forgiveness program applications, and approval documents. After each call with your loan servicer, record the time, representative ID, and key discussion points. Store these critical materials both in cloud services and physical devices (like external hard drives) for dual protection.

Borrowers lacking complete documentation face the greatest risks during major institutional reorganizations. Investing a weekend to systematically organize these files could save your family thousands in unnecessary costs and significant stress down the road. These records will serve as your strongest evidence in defending your rights.

• Create a "Policy Change" Emergency Fund

Consider setting aside three to six months of basic living expenses in a dedicated high-liquidity account, separate from regular savings. This fund should exclusively address sudden repayment condition changes or service disruptions.

When application processing slows or customer service delays occur, this buffer maintains your financial stability, preventing pressured acceptance of unfavorable repayment terms.

Financial experts typically recommend placing such funds in money market funds or high-yield savings accounts—earning modest returns while remaining instantly accessible. Establishing this dedicated reserve is the most practical financial safeguard against policy uncertainty.

(Source: Freepik)

• Evaluate and Potentially Accelerate Forgiveness Pathways

If you’re enrolled in Public Service Loan Forgiveness or an income-driven repayment plan, now is the time to meticulously review completed qualified payment months and employer certification status. Before policy changes take effect, consider moderately increasing monthly payments to accelerate progress toward forgiveness eligibility.

Discuss your personal situation thoroughly with a qualified financial advisor to evaluate whether continuing to pursue forgiveness or paying off debt early better serves your interests. Note that most forgiveness programs require 20–25 years of consecutive payments, and processing delays during agency reorganization could cause you to miss critical eligibility deadlines, rendering years of repayments futile.

• Diversify Financial Planning to Reduce Single-Program Dependence

Never pin all financial hopes on a single forgiveness program or policy. Proactively develop additional professional skills, explore sustainable side hustles, and strengthen personal income resilience.

Simultaneously, formulate multiple debt management strategies—such as consolidation, rate renegotiation, or partial prepayment plans. Revisit and adjust long-term financial goals to reduce reliance on specific government forgiveness initiatives.