It’s Your Money: What’s going to happen to college financial aid and student loans?

NEWS: Trump signs executive order to dismantle the U.S. Department of Education.WHAT IT MEANS TO YOU: If you’re applying to college, in college, or owe money on student loans, it could put a major crimp in your plans. If you don’t fall into any of those categories, there will still be short and long-term effects to the economy and culture.

The executive order issued Thursday doesn’t beat around the bush: It says Education Secretary Linda McMahon will “to the maximum extent appropriate and permitted by law, take all necessary steps to facilitate the closure of the Department of Education and return authority over education to the States and local communities.”

McMahon Thursday issued a statement that said: “Closing the Department does not mean cutting off funds from those who depend on them — we will continue to support K-12 students, students with special needs, college student borrowers, and others who rely on essential programs. We’re going to follow the law and eliminate the bureaucracy responsibly by working through Congress to ensure a lawful and orderly transition.”

Friday the administration announced that the Small Business Administration would now administer student financial aid, from loans to Pell Grants. With the administration cutting SBA staffing by 50%, it’s unclear how that will play out. The law that establishes student aid also says what department administers it, so Congress may have to approve that, though Trump said the move will be immediate. Media previously reported that If another department is going to carry out programs established by law – which student financial aid is – it’s up to Congress to determine what department will handle it, and how.

No matter what happens, all signs point to students who depend on federal loans, repayment plans that are income-based, Pell grants, and public service forgiveness will likely face some serious hardship soon, if they aren’t already.

$1.6 trillion ‘portfolio’

One big sign of that is the part of the executive order that points out that the federal student loan debt portfolio, at more than $1.6 trillion, is the same size as Wells Fargo’s. One of the country’s largest banks, it employs more than 200,000. With 50% staff cuts, the Office of Federal Student Aid was down to a little more than 700.

“The Department of Education is not a bank, and it must return bank functions to an entity equipped to serve America’s students,” the executive order says.

The federal government has worked in the past two decades to streamline the student loan process, and make it more affordable for all students by removing the private sector. Up until about a decade ago, some federal student loans came from private lenders, backed by the federal government. Congress found this made them too expensive for many students and added unneeded levels of bureaucracy. Since then the government has worked to streamline the system, making loans more affordable, cutting waste and red tape, and reducing fraud by getting for-profit companies out of the picture.

One of Project 2025’s rationale’s for eliminating the Department of Education is to privatize the student loan system, in part because the federal government doesn’t make good choices about who to lend to. Privatizing federal student loans would mean private lenders making money off of students, fewer options for low-income and marginalized students to get loans. It would be a system that’s not affordable to many, with little oversight and a much greater chance of fraud.

Overseeing the $1.6 trillion in federal student loans owed by nearly 43 million Americans is only part of what the Office of Federal Student Aid does. Or did, rather.

It also oversaw the 7 million or so Pell Grants that are granted a year, and determines who will get them, and how much they will be awarded. As many as 20 million young people a year fill out the federal student aid application, and those must be processed efficiently as students make choices about where, or whether, to continue their education.

Doing all of that is a massive undertaking. Going into 2025, the Department of Education employed 4,133, with 1,440 in the FSA office. Report are 727 FSA staffers have either been terminated or taken a buyout, about a 50% reduction. It’s not clear if those employees will be moved to the SBA, and how many SBA employees will be available to administer student financial aid.

Those who applaud dismantling of the Department of Education as a way to “get rid of waste and fraud,” seem to miss the point that doing it without a solid plan is the most wasteful move you can make. It’s like deciding, because you have too many household expenses, to stop paying your mortgage. To your surprise, your credit score tanks, then your house is foreclosed on. You won’t have many expenses living in a cardboard box under a bridge, but you also don’t have much to show for your bare-bones budget.

If nothing else, dismantling the department means that the federal government will be much less likely to get that $1.6 trillion that it’s owed. Doesn’t sound very cost-efficient to me.

Before Thursday’s executive order and Friday’s SBA announcement, things already were not working in many ways for student loan borrowers and those who get financial aid. Let’s take a look at the status of financial aid.

FAFSA

The Free Application for Financial Student Aid is still available online and there’s no indication from its website of any disruptions.

That’s the website, not the what rumbles underneath it. Industry experts in recent weeks have said they’re concerned that without the staff to process the data from the 17 million or so FAFSAs filled out a year, the system will grind to a halt.

The National College Attainment Network estimates that about 57% of high school seniors fill out a FAFSA. That completed the form “is one of the best predictors of whether a high school senior will go on to college,” with those students 84% more likely to immediately enroll in postsecondary education, NCAN said. Low-income students show a 127% increase in immediate college enrollment if they complete a FAFSA.

The Department of Education updates FAFSA yearly, and it’s available Oct. 1 (except when it’s not, more on that shortly). The department processes the completed forms and sends the information to the schools the student requests, usually within days. The schools put together a financial aid offer to the student based on FAFSA information.

Students who receive financial aid, including federal student loans, must complete a FAFSA every year they’re in school in order to maintain their aid and borrow student loan money.

If you’re a college student, or the parent or guardian of one, you may remember the chaos that ensued at the end of 2023, when FAFSA availability was delayed until Dec. 30. It caused a backlog, with many schools unable to offer financial aid packages until after their acceptance deadline. This, of course, caused students to put off making decisions about where – or whether – to pursue a post-secondary education.

Since it’s March, it’s likely that many high school seniors planning to continue their education , as well as those already in school, have completed the process. If the system goes awry, it’ll take word of mouth from those who have yet to complete their forms to make that known, since the executive department isn’t being transparent about specifics on cuts or their effects. Or we’ll find out in the fall.

Federal Student Loans

About 93% of students who borrow to pay for post-secondary education do it through the federal student loan system, rather than private lenders. There’s a reason for that – the federal loans have lower interest, you don’t need a credit score or credit history to qualify, and there are breaks for low-income borrowers.

Students who want to borrow federal student loans must complete a FAFSA before they can apply for the loans.

FSA oversees Direct Subsidized and Unsubsidized Loans, PLUS Loans (for parents and graduate students), and Direct Consolidated Loans. There are specific eligibility rules for each loan, and they require accurate applications that are then processed at FSA. With half of the staff that keeps all the balls in the air gone, it’ll be interesting to see how efficiently this process works.

Administering the $98 billion a year in loans and $1.6 trillion that’s owed is a complex process carried out – or had been carried out – by skilled workers who had years of experience in its intricacies. It’s not clear if they’ll change departments, or new people at the SBA, will be doing the work

The executive order, and Project 2025 have made it pretty clear it could be private for-profit lenders. If that happens, low and moderate income students and populations who are still frequently left out of traditional banking solutions can expect to find it a lot harder to borrow for their post-secondary education. And, as with all privatization, the opportunity for waste, fraud and abuse will skyrocket.

That $1.6 trillion in federal student loan debt has been referred to frequently in recent weeks by the federal government as a “portfolio.” I wonder how much a big bank or investor would pay for that kind of portfolio?

Federal student loan repayment

The new Saving for a Valuable Education (SAVE) plan, designed for the lowest-income borrowers, ended up in court last year because of a challenge to its provision that part of the balance of a loan would be forgiven if the borrower made on-time payments for a certain number of years. Other income-driven federal student loan repayment plans also offer forgiveness, but the SAVE plan based it on a different law, and those who don’t like loan forgiveness had an opening to go after it.

Borrowers in the SAVE plan are in forbearance – they’re not paying their loans while it’s in court. They’ll have to pay one way or another once the court makes it’s decision. If the court rules against SAVE, their payments could quadruple or more, with interest charged on the new amount and no forgiveness.

SAVE is one of four income-driven repayment plans offered by FSA. The current administration saw the SAVE challenge as an opportunity to “pause” all federal income-driven repayment plans. I use “pause” with a qualifier, because applications for the plans are no longer available online. Borrowers can still submit paper applications, but there’s no one in the FSA office to process them. Meanwhile, borrowers who are in these plans are saying on social media and to reporters that they’ve been removed from their income-driven plan and put in the standard repayment plan.

The other income-driven plans are Income-Based Repayment, for lower-income borrowers; Income-Contingent Repayment, for borrowers who struggle to make the standard payment but don’t qualify for IBR; and the Pay As You Earn (PAYE) plan, which is another program for lower-income borrowers who have student loan debt from the past decade or so. All of the plans offer longer payoff terms, some as much as 25 years, than the standard repayment plan, with payments based on a portion of income and possible forgiveness at the end of the payoff period if payments were made on time.

The standard repayment plan is a simple 10-year plan based on what you owe. With rising college costs, it’s a plan many students struggle to afford. If you have $38,374 in student loan debt, the 2024 average, at the 6.53% interest charged on a Direct Unsubsidized Loan, your payment is $436 a month. That’s a lot of money for the average college graduate or young person, or even older person, trying to manage housing costs, groceries, child care, and everything else that comes with getting out there and living your life.

Income-driven plans can reduce that amount to a fraction, depending on the borrower’s income (using a formula based adjusted growth income reduced by a percentage of the poverty guideline income), the amount they borrowed, and the repayment term, anywhere from 10-25 years, depending on the plan.

Newsweek reported this week that students across the country were shocked to find that their income-drive plan had been replaced with the standard plan. One student said his credit score had plummeted 150 points, because he now owed quadruple what his payback amount under the plan was. Another said that her monthly payment suddenly rose by $900.

This all happened with no warning. Imagine your monthly budget increasing by $900 when you had no idea it was about to happen.

Many borrowers in this situation have told the media, or posted on social media, that their loan servicer told them the only options are to pay or defer the loan. During deferment, interest still accumulates and is added to the balance. Borrowers end up paying back much more than they would’ve otherwise, and sometimes their payment doesn’t even cover the interest owed.

Income-driven repayment plans are popular as college costs have soared. Recent administrations streamlined them and made them more efficient, as well as more accessible to lower-income borrowers who struggle after they graduate to make payments. Many of those who benefit from income-driven plans, particularly SAVE, are students from populations that have traditionally had trouble affording college.

The result of discarding income-driven student loan repayment plans will be millions more Americans in debt, with bad credit, less able to pay bills or contribute to the economy. The federal government also won’t get the loan repayment money that it had coming to it. That’s assuming, of course, it doesn’t sell off the portfolio to a private entity. If it does, the feds may get a portion of their money, fast, but many more borrowers will end up financially screwed.

“What we’re currently seeing is the worst-case scenario for student loan borrowers,” Alex Beene, a University of Tennessee-Martin financial literacy instructor, told Newsweek. “Not only are the plans introduced in recent years that provided additional student loan repayment and forgiveness options going away, but much of the staff that oversaw these programs and were able to provide assistance to these borrowers have been let go. The result is payments without support of repayment or forgiveness plans are going up, customer service is virtually non-existent, and borrowers feel left out in the cold as these sweeping changes upend their financial lives. It’s challenging on all ends.”

Michael Ryan, a finance expert, told Newsweek, “Many payments now don’t even cover accruing interest, creating negative amortization where loan balances grow despite regular payments. A particularly troubling aspect is that high-balance borrowers with moderate incomes could end up in perpetual debt if forgiveness timelines are eliminated.”

Public Service Loan Forgiveness (PSLF)

The Public Service Loan Forgiveness (PSLF) Program was established in 2007 as a way to encourage people graduating from college to go into public service jobs, which traditionally pay less than jobs in the private sector. The balance of a student loan is forgiven for Direct Loan borrowers who make 120 monthly payments under a qualifying repayment plan – including most of the income-driven plans – while working full-time for a qualifying employer.

The Biden administration added waivers for borrows who had made their payments and qualified for forgiveness but had faced delays or denial of forgiveness under the previous Trump administration, as well as simplifying eligibility standards after, increasingly, borrowers who eligible to enroll were denied during Trump I.

Trump signed an executive order earlier this month that said: “The PSLF Program has misdirected tax dollars into activist organizations that not only fail to serve the public interest, but actually harm our national security and American values, sometimes through criminal means. The PSLF Program also creates perverse incentives that can increase the cost of tuition, can load students in low-need majors with unsustainable debt, and may push students into organizations that hide under the umbrella of a non-profit designation and degrade our national interest, thus requiring additional Federal funding to correct the negative societal effects caused by these organizations’ federally subsidized wrongdoing.”

The executive order says it has “restored” PSLF, but what it’s done is halted it.

The PSLF webpage says even though it’s “paused,” those in the program are still in it and don’t have to take any action while it’s being “reviewed.” In other words, borrowers keep making their payments, but if their forgiveness window arrives, they’re not going to get it.

New borrowers aren’t eligible to enroll.

So, in effect, PSLF doesn’t exist. It’s not likely it’ll be reinstated under this administration unless a court orders it. So far, it hasn’t been challenged in court.

Let’s take a look at the “activist” jobs that “fail to serve public interest” and “harm our national security and American values” that qualify for the program:

• Anyone who works for a U.S.-based government organization (federal, state, local, or tribal), including the military. (If it survives, government workers who’ve lost their jobs and are enrolled won’t be eligible, since they no longer work for the government entity).
• Not-for-profit organizations that are tax-exempt under Section 501(c)(3) of the Internal Revenue Code. According to the IRS, these are charitable, religious, educational, scientific, literary, public safety, fostering national or international amateur sports competition, and preventing cruelty to children or animals, among others.
• Other not-for-profit organizations that devote a majority of their full-time equivalent employees to providing certain qualifying public services, including law enforcement, fire safety, emergency management, public health, public education, public library services and public service for the elderly.

Not eligible are jobs for for-profit businesses and nonprofits that are political or labor unions.

Boy, I’m glad we’re making sure that all those people who sacrifice to become teachers, librarians, cops and firefighters, work in animal shelters, help children who have suffered abuse, and all those other non-American-value jobs aren’t going to get a break on their student loans after working in the job for 10 years and making all their payments back to the federal government on time. Glad to see all that waste and fraud going away!

Pell Grants

Pell Grants began in 1972 as Basic Education Opportunity Grants, but were renamed in 1980 for the man who created them, Claiborne Pell, a U.S. senator from Rhode Island. They provide money to low and moderate-income students and are the largest source of federal grant aid. They’re need-based and are intended to be the foundation for all need-based federal student aid awarded to undergraduates, according to a congressional summary.

The program provided $31 billion in aid to approximately 6.5 million undergraduate students in 2023. They’re grants, so they don’t have to be repaid.

The program, for the first time in its history, is facing a fight in Congress, which has indicated it may not fund them this year.

With the Thursday executive order, Trump said that administration of Pell Grants, like student loans and repayment, would be “redistributed to various other agencies and departments.” But again, no provisions have been made for that to happen, and meanwhile, it’s not clear if the SBA is equipped to handle the program any better than the half-staffed FSA would have been.

The uncertainty about the future, the combination of the program being in limbo and the Republican-led Congress balking at funding Pell Grants will make it easier for them to disappear.

WTF is happening?

Secretary of Education McMahon may be more familiar to you as the wife of Vince McMahon, head of World Wrestling Entertainment. She was a star player in many of WWE’s bizarre scripted antics over the years. In any case, Thursday, in her new role (there’s a merit-based hire right there), she said that the dismantling of the Department of Education, “Will free future generations of American students and forge opportunities for their success.”

It’s hard to see how the changes so far will do that.

Beth Maglione, interim president and CEO of the National Association of Student Financial Aid Administrators had a different take.

“American families and college students need financial aid that is accessible, predictable, and reliable,” Maglione said in a statement on NASFAA’s website Thursday. “Creating chaos and uncertainty in the agency that oversees the administration of those funds is not the way to achieve that.”

Trump has made no secret he wants the Department of Education gone, with backing from Project 2025. I can’t imagine that it would be dismantled while its programs remain intact. The current administration knows it can count on racism and ignorance to support much of what they’re doing. It has nothing to do with waste, fraud and abuse – in fact all these moves will likely increase it. What it is, is a path to cutting the federal budget in order to renew the 2017 tax cuts that mostly benefit very wealthy Americans.

It will also help wealthy Americans in another way by selling off and privatizing government functions, a proven way to raise costs for the average American and get rid of government oversite, while putting money in the pockets of rich people.

Let’s look in more detail.

Lower test scores

One of the Trump administration’s rationales for dismantling the Department of Education is that test scores are worse, or haven’t improved, since the department was created in 1979 by President Jimmy Carter.

But, if you’re just going to base success on test scores, that’s not entirely true. The Nation’s Report Card most recent Long-Term Testing assessment found the average reading score for 13-year-olds in 2023 was not statistically significantly different from 1971, but in 2020, it was 4 points higher. The COVID-19 pandemic had a negative impact. With match scores, the average LTT re for 13-year-olds in 2023 was 5 points higher than in 1973, but 9 points lower than 2020.

LTT stats over the past 54 years show a slight, but steady rise in reading scores and a bigger, equally steady, rise in math scores.

In other words, scores were going up until COVID hit, and as far as math goes, still are.

Multiple studies have shown that students learn more and score higher on tests when they have three square meals a day and the food is healthy. Yet, the U.S. Department of Agriculture has ended funding for the wildly successful program that linked local farms to public schools. The programs provided more healthy food for kids, allowed more free meal programs in school, and also supported local economies. It also saved money down the chain, reducing waste and fraudulent big-ticket food contracts, by getting food from local sources.

So, do they really care about test scores? It doesn’t look like it.

Giving it back to the states. Most education, including curriculum, is up to the states. It’s all decided at state level. About 13.7% of public school funding is federal, and a lot of that is to cover things like individual education programs (IEPs) for students who have special needs.

So, who is really affected? The major duties of the Department of Education are administering financial aid and student loans; federally enforcing the Individuals with Disabilities in Education Act, which protects students and teachers who have disabilities; and funds programs for special education, English-language learners and low-income students.

The second largest office after FSA in the Department of Education is the Office for Civil Rights, which had about 580 employees before half of them lost their jobs. The staffers that are left are busy investigating colleges and universities it claims have violated Title VI of the 1965 Civil Rights Act by “discriminating” against white students. They’re also investigating schools and states (like Maine), for purported violations of Title IX, which protects students from gender discrimination, by allowing transgender athletes to compete.

Cuts at, or eliminating, the department will affect low-income students, marginalized populations, including students with special learning needs or disabilities, students who are housing-challenged, and new Americans. They’ve eliminated the jobs that enforce polices, so even if school districts continue to get money for programs, there’s no one who will make sure it’s spent correctly.

Much of what the Trump administration is doing with education is pitched as things returning to being “merit-based,” but when there’s no one to make sure that happens, “merit” tends to mean white and, frequently, male. It’s why America has decades of historic legislation making sure everyone is given the same opportunity for a solid education and to build wealth.

But we won’t know. In a truly Kafkaesque move (or authoritarian, take your pick) the administration has eliminated the Department of Education’s National Center for Education Statistics and the rest of its research functions. That means no one will be keeping track of the impact.

You can reach Maureen Milliken at mmilliken@manchesterinklink.com