Moving Federal Student Loans From the Department of Education to the Small Business Administration Would Make Borrowing Riskier

The Trump administration and U.S. Secretary of Education Linda McMahon are quickly implementing Project 2025’s¹ proposal to eliminate the U.S. Department of Education. On March 11, 2025, the administration significantly diminished the size and capacity of the Education Department through a legally questionable² reduction in force³ that affected nearly one-third of the department’s pre-inauguration workforce.⁴ The following week, on March 20, 2025, President Donald Trump signed an executive order that calls to dismantle the Department of Education.⁵

Project 2025’s proposal for dismantling the department would transfer the administration of federal student loans to the Treasury Department.⁶ Bills have already been introduced to carry out this goal: S. 5384 was introduced in the 118th Congress by Sen. Mike Rounds (R-SD), and H.R. 369 has been introduced in the 119th Congress by Rep. David Rouzer (R-NC).⁷

While some Republican members of Congress have shown an interest in dismantling the Department of Education by legislative action, one day after signing the executive order, President Trump announced in a meeting at the White House that the administration of federal student loans would be transferred “immediately” to the Small Business Administration (SBA) without waiting for legislation to pass.⁸ Meanwhile, the SBA is undergoing its own reorganization, one that will eliminate 2,700 positions, or 43 percent of the agency’s pre-inauguration workforce.⁹ This would leave the SBA with limited capacity to take on the student loan portfolio.

The mission of the SBA is vital: to maintain and strengthen the nation’s economy by enabling the establishment and vitality of small businesses and assisting with the economic recovery of communities after disasters.¹⁰ This is particularly necessary right now, considering the economic turmoil brought about by the Trump administration’s recent action on tariffs.¹¹

The relationship between the SBA’s mission and the administration of the federal student loan system is unclear, as is whether SBA has the personnel and other resources necessary to oversee such a complex loan system that includes the primary Federal Direct Loan Program and three legacy programs—the latter of which no new loans have been made under since 2010.

Since 2010, federal direct student loans were made using master promissory notes.¹² These notes require the borrower—whether a student or a parent of an undergraduate student—to promise to repay the loans to the Education Department, reflecting the role of the department in making and servicing loans. No provision of current law allows for the transfer of this function to another federal agency.¹³ To move the loans to another federal agency without specific statutory authority would call into question the ability of the government to enforce the debt, placing the entire student loan portfolio at risk.

The legacy programs—Federal Family Education Loans (FFEL), Health Education Assistance Loans (HEAL),¹⁴ and Perkins loans—are primarily managed by private lenders and institutions of higher education. These private lenders and institutions administer loans that are still outstanding and in varying states of repayment.¹⁵ The legacy programs operate under agreements between, in the case of FFEL and HEAL, the secretary of education and lenders and guarantee agencies, and in the case of Perkins loans, between the secretary of education and institutions of higher education.¹⁶ Without a change in law, it is unclear under what legal authority or with what resources the SBA can act to carry out the roles and responsibilities of the secretary.

A potential clue as to how much of a lack of understanding exists within the Trump administration regarding the federal student loan system can be found in the executive order calling to dismantle the Department of Education. The administration makes a comparison between Wells Fargo and the Federal Student Aid (FSA) program, noting that they are roughly equal in portfolio size, yet Wells Fargo requires some 200,000 people to operate its banks while FSA runs much more efficiently, with only 1,500 employees prior to the recent staffing reductions.¹⁷ However, this comparison is flawed because FSA staff are supported by contractors.¹⁸ FSA staff are also engaged in a variety of other critical functions, including operating the Free Application for Federal Student Aid (FAFSA) system that students and parents use to apply for federal, state, and institutional aid; ensuring institutional and program eligibility; and providing training and technical assistance to high school counselors and financial aid professionals.¹⁹ Their ability to handle all of this demonstrates the efficiency and effectiveness of FSA.

As indicated above, the SBA lacks the current legal authority under the Higher Education Act of 1965, as amended, to make or service federal student loans.²⁰ Unless Congress reassigns authority to the SBA, it is likely illegal for the agency to attempt to enforce the requirements that the law clearly assigns to the Education Department. The SBA, which will have approximately 3,800 employees after it is reorganized, also lacks the staffing and other resources necessary to properly administer the loan programs.²¹

The SBA is not accustomed to servicing and collecting a large number of relatively low-value loans with small payments. In addition, servicing of federal student loans is complicated by the number of repayment options that are currently offered and must be explained to borrowers.²² In fiscal year 2023, the SBA guaranteed 68,000 loans, totaling nearly $34 billon for an average of nearly $500,000 per loan.²³ In the same fiscal year, the FSA made 12.6 million loans, totaling $88.4 billion for an average of a mere $7,000 per loan. (see Figure 1)

Further complicating matters, the Education Department currently oversees five loan servicers with which it contracts. This responsibility would also transfer to the SBA,²⁴ yet the SBA does not have experience contracting out servicing, since this is done for the SBA by the lenders that make the loans or by subsequent loan holders. If the SBA were to take over the entire student loan system, they will have to build the capacity to oversee these vital contracts while also bearing the responsibility for overseeing a cast of other players in the legacy Perkins loan and FFEL programs—including commercial and institutional lenders and guaranty agencies, as well as the Education Department’s loan servicers, total and permanent disability servicer, and default collection contractors.

To some extent, however, the FFEL’s legacy system has more in common with the SBA’s current programs than with the currently active and significantly larger Federal Direct Loan Program. The SBA’s three loan programs each rely on private lenders to make and service loans: 1) the 7(a) loan program, which is the SBA’s primary small business loan program; 2) the 504 loan program, which is the SBA’s economic development program; and 3) the microloan program, which makes loans to nonprofit intermediaries that lend to small businesses and startups.²⁵

The 7(a) program, for example, directly guarantees loans made by private lenders to small businesses,²⁶ while loans made under the legacy FFEL program were made by private lenders but guaranteed by one of several nonprofit agencies.²⁷ Unlike the FFEL program, lenders participating in the SBA 7(a) loan program review applications and either approve loans without a guarantee or seek a guarantee from the SBA if the borrower fails to meet the standard, conventional underwriting guidelines. If the lender follows the SBA’s regulations, the SBA will receive the amount of the guarantee if the borrower fails to repay the loan.²⁸

The risk of transferring the student loan programs to the SBA is high for the 42.7 million people and their families with outstanding student loans.²⁹ When student loan borrowers and their families signed the promissory notes of their federal student loans upon enrolling in postsecondary education, they began to develop life plans based on an understanding of how they could meet their loans’ terms and conditions. Borrowers also discussed these terms during entrance and exit counseling and through subsequent interaction with their loan servicer(s).

Shifting responsibility for federal student loans to the SBA has the potential to disrupt borrowers’ life plans by increasing their monthly payments, extending the period of time required to cancel student loans based on public service or the number of years in repayment, and denying other statutory benefits provided to borrowers. Currently, borrowers under the Federal Direct Loan Program are entitled to have their remaining student loan debts canceled if they make 120 on-time, monthly payments while engaged in public service. After taking down the website allowing borrowers to enroll in income-driven repayment plans for a period of time, the Trump administration has announced that it is moving ahead with plans to modify the rules governing repayment, including repayment through public service.³⁰

Even without these complications, the Education Department learned about the risks of transferring large loan portfolios when it acquired student loans from private lenders in the aftermath of the 2008–2009 credit crisis. During and immediately after the crisis, the department purchased $110 billion in student loans and transferred those loans to FSA’s servicing platform.³¹ Many issues can occur during the transfer process, including borrowers seeing increases in their monthly payments and interest rates when a new servicer is not aware that the original lender offered a lower interest rate. In addition, it is possible for borrowers to fall through the cracks while their loans are being transferred, resulting in payments not being appropriately applied. As a result, those payments may be recorded as late or not received. Since nonpayment and late payment of student loans are often reported to credit rating agencies, this can have long-term consequences for borrowers even after the error is corrected within the federal accounting systems.

Taxpayers are also at risk. Today, more than $1.6 trillion is outstanding under the Federal Direct Loan Program, FFEL, and Perkins loan program.³² If even a small share of any of those student loans are mismanaged, taxpayers will not benefit from the repayment of them.

For example, if one or more of the federal loan servicers under contract to FSA to handle federal direct student loans—which account for $1.47 trillion, or 90 percent of all federal student loans—fails to effectively serve borrowers, revenue will suffer.³³ In fiscal year 2024, borrower interest, principal, and net default collection payments under the Federal Direct Loan Program totaled $128.6 billion.³⁴ Even a 10 percent decline in payments would cost taxpayers nearly $13 billion annually.

While all new federal student loans have been Federal Direct Loan Program loans since 2010, not all the outstanding federal student loans are this type.³⁵ Currently, $165.4 billion is outstanding in the FFEL program.³⁶ These loans are held by a mix of commercial lenders (40 percent), Education Department federal loan servicers (27 percent), the Education Department default management system (21 percent), and guarantee agencies (13 percent).³⁷ If any of these servicing systems falter, revenues to loan holders—including the federal government for loans purchased or held—will fall.

A critical element of the federal student loan programs is the ability to repay loans through public service. While many people challenged the student loan debt cancellation policies  of the Biden administration, loan cancellation has been a feature of the federal student loan system since the first National Defense Education Loan was made in the 1950s. Federal student loans have always had an element of social insurance built into them.³⁸ This social insurance includes cancellation after death of the student or borrower or disability that prevents them from working; interest rates that apply to all borrowers equally without preferential rates for those from more affluent families; and forgiveness after a period of teaching or other public service.

After meeting the cost of this social insurance, taxpayers need to be assured that any remaining revenue will be captured and applied to the common good. That will not happen if the federal student loan system is broken due to a lack of understanding of how the current system works. The SBA, for all its good and important work, lacks that understanding.

Transferring the servicing and collection of federal student loans to the SBA would introduce significant, unnecessary risk to taxpayers and borrowers. There are valid reasons to be critical of the Education Department’s servicing of student loans, including an outsize focus on canceling debts and a potential to be too aggressive in collections. However, one thing seems certain: The Trump administration will wish that it had left well enough alone when things go wrong in the administration of the important, but complex, student loan system that touches the lives of so many Americans.