The federal student loan system was spared in the Department of Education’s reorganization announced earlier this week, which will shift several key offices to other federal agencies. But Democratic lawmakers are warning that the administration has other plans for federal student loans, and borrowers may soon be at risk of losing critical legal protections if those plans succeed.
In its announcement earlier this week, the Education Department indicated that multiple offices within the department will be transitioned to other federal agencies through new partnership agreements, diminishing its overall operations and furthering President Donald Trump’s goal announced in March to abolish the department entirely. The Office of Federal Student Aid, which manages the federal student loan system, was not included in that announcement and will remain housed at the department, at least for now.
But more than 40 Democratic members of Congress warned this week that the Trump administration may instead try to sell portions of the federal student loan portfolio to private companies in an effort to further break down the Department of Education. A sale of federal student loans could jeopardize borrowers’ access to key repayment, loan forgiveness, and discharge programs, said the lawmakers. Here’s what a selloff could mean for borrowers.
Lawmakers Warn That Selloff of Student Loans Could Jeopardize Legal Protections
In a letter sent on Sunday to Secretary of Education Linda McMahon and Treasury Secretary Scott Bessent, nearly four dozen Democratic lawmakers warned that selling off the Department of Education’s federal student loans to private companies could have devastating consequences for borrowers.
“We write in light of reports of ongoing conversations between the Trump Administration and finance executives about the potential sale of the federal student loan portfolio to the private sector,” wrote the lawmakers, citing to Politico reporting as well as a Fox News report last month that indicated that Treasury Department officials have have run “multiple models” on the potential sale of student loan debt to private industry. “This sale would be a giveaway to wealthy insiders at the expense of working-class borrowers and taxpayers.”
The lawmakers warned, “By selling parts of the federal student loan portfolio, the Trump Administration may seek to unlawfully strip borrowers of their legally guaranteed protections,” including access to income-driven repayment as well as student loan forgiveness on the basis of public service employment, death and disability, and school misconduct. “Private lenders typically do not guarantee these kinds of borrower rights,” they wrote.
Student loan borrower advocacy groups echoed these concerns.
“Instead of helping the millions of borrowers on the brink of default and reducing the unprecedented backlog of over one million IDR applications from borrowers desperately seeking more affordable payments, the Trump Administration seems more interested in selling out working families to the highest bidder,” said Protect Borrowers policy director, Aissa Canchola Bañez in a statement last month. Protect Borrowers has been representing a major national teachers union in an ongoing legal challenge over the department’s failure to process IDR applications as well as loan forgiveness for IDR and PSLF borrowers.
Sale of Student Loans To Private Companies Is Potentially Legal, But Complicated
The Trump administration and Republican lawmakers have suggested transferring the Department of Education’s federal student loan portfolio to another federal agency, such as the Treasury Department or the Small Business Administration. But most observers argue that such a transfer cannot be effectuated without an act of Congress.
In contrast, a 1998 federal law already allows the government to sell federal Direct student loans to private parties. But the requirements for doing so are somewhat complicated, and it has never been done before.
“Congress authorized the Secretary of Education, ‘in consultation with the Secretary of the Treasury,’ to sell existing Direct Loans,” said the Project on Predatory Student Lending (PPSL), a nonprofit student loan borrower legal group, in an analysis earlier this year.
To effectuate a sale, it must “break even” with no monetary loss to the government. The definition of “break even” is not exactly clear. But according to PPSL’s analysis, “As of September 30, 2024, the Direct Loan portfolio outstanding balance stood at roughly $1.47 trillion. The Department estimated a positive subsidy cost to the government of approximately 31 cents on the dollar— meaning the breakeven price of the portfolio to the federal government is around $1.08 trillion.”
However, PPSL cautioned that “this figure is almost certainly wrong. It is calculated using a proprietary model (the Student Loan Model) whose data inputs and assumptions have proven wildly off-base. In fact, for three years running, an independent auditor has been unable to provide an opinion on FSA’s balance sheet ‘because of errors identified in the underlying data used to calculate’ the cost of the program.”
Given these challenges, and the sheer volume of federal student debt, it’s more likely that a private company may buy portions of the Department of Education’s federal student debt, rather than the entire portfolio of student loans. But even then, PPSL notes there might be complications that would give any prospective buyer reasons to be cautious. These include:
- The loss of unlimited time to collect on student loans. While the government is not subject to any statute of limitations to collect on unpaid student loan debt, private lenders are.
- The loss of government collections powers such as the ability to garnish wages without a court order, intercept tax refunds, or offset Social Security payments. Social Security, in particular, is generally exempt from collection efforts by private lenders, but not by the government.
- The loss of government immunity from lawsuits. It’s generally more difficult to bring a legal challenge against the government than it is to sue a private actor because of the concept of “sovereign immunity,” which can shield entities like the Department of Education from litigation over poor student loan servicing or inadequate record-keeping. Private lenders and loan holders would not be subject to sovereign immunity.
Sale Of Student Loans Could Make Accessing IDR And Loan Forgiveness Harder
The Democratic lawmakers writing to Secretaries McMahon and Bessent this week noted that even if a sale of federal student loans occurs, borrowers would be entitled to retain the benefits provided by law and under contract including access to income-driven repayment plans, as well as student loan forgiveness and discharge programs.
“The federal government cannot simply eliminate its legal obligations to borrowers,” wrote the lawmakers. “Federal law requires that the protections guaranteed in the original terms of a borrower’s loan must be honored even if the Department of Education proceeds with a sale. As stated in the Higher Education Act, each loan sold ‘shall be separately enforceable in all Federal and State courts…in accordance with the terms’ of the original loan. Any attempt to strip federal borrowers of their current protections through the sale of student debt would be illegal and would open the door to exploitative behavior by schools and private loan servicers.”
Congress could potentially try to pass legislation that would strip federal student loans subject to a sale of their legal protections. Or, the Trump administration could try to take unilateral steps to do so. But the PPSL suggested that doing so could be illegal (or at the very least, could invite viable legal challenges).
“Any law stripping repayment rights or other favorable terms from student loan contracts would potentially trigger an obligation to compensate student loan borrowers for the loss of those terms, as the terms are specifically referenced in the standard loan forms and disclosures,” wrote PPSL. In any case, there are no indications at this time that lawmakers are seriously considering any legislation that would strip federal student loans of legal protections.
Nevertheless, the Democratic lawmakers warned that even if borrowers technically retain access to federal student loan forgiveness and repayment programs guaranteed by federal statute and loan contracts, a sale of student loans to a private company could endanger these programs, as a for-profit company would have financial incentives to hinder borrowers’ access.
“As experts have explained, private investors’ ‘interest would likely be to squeeze as much profit from the repayment as they could,’” wrote the lawmakers. “Those profits would likely come at the expense of the borrower via fewer protections and less generous benefits.”
“The sale of federal student loans would be a lucrative giveaway to the multi-billion-dollar private lending industry, which has a demonstrated history of exploiting vulnerable borrowers for financial gain,” they concluded.
So far, Trump administration officials have made no public announcement that a sale of federal student loans is imminent. But reporting indicates that officials are actively exploring a potential selloff of at least a portion of the federal student loan portfolio, and a successful sale would allow officials to claim they are even closer to fully eliminating the Department of Education, a major goal for President Trump. For now, borrowers have no choice but to wait and see how this process plays out. In the meantime, the Democratic lawmakers demanded that Secretaries McMahon and Bessent provide detailed information on the administration’s efforts so far, as well as potential conflicts of interest.