The Future of Federal Student Loans

The U.S. student loan system, now exceeding $1.7 trillion in debt and affecting over 40 million borrowers, is facing significant challenges. As political pressures rise, the management of student loans could be significantly altered. A combination of potential privatization, the elimination of the U.S. Department of Education (ED), and a new role for the Department of the Treasury raises critical questions about the future of the system.

U.S. Department of Education: Strained Resources and Outsourcing

The U.S. Department of Education (ED) is responsible for managing federal student loan servicing, loan forgiveness programs, and borrower defense to repayment (BDR) claims. However, ED has faced ongoing issues with understaffing and inefficiency, particularly as many functions have been outsourced to contractors. Companies like Maximus (including subsidiaries like AidVantage) manage much of the administrative burden for loan servicing. This has raised concerns about accountability and the impact on borrowers, especially those seeking loan relief.

In recent years, ED has also experienced staff reductions and funding cuts, making it difficult to process claims or maintain high-quality service. The potential for further cuts or even the elimination of the department could exacerbate these problems. If ED’s role is diminished, other entities, such as the Department of the Treasury, could assume responsibility for managing the student loan portfolio, though this would present its own set of challenges.

Potential for Privatization of the Student Loan Portfolio

One of the most discussed options for addressing the student loan crisis is the privatization of the federal student loan portfolio. Under previous administration discussions, including those during President Trump’s tenure, there were talks about selling off parts of the student loan portfolio to private companies. This would be done with the aim of reducing the federal deficit.

In 2019, McKinsey & Company was hired by the Trump administration to analyze the value of the student loan portfolio, considering factors such as default rates and economic conditions. While the report's findings were never made public, the idea of transferring the loans to private companies—such as banks or investment firms—remains a possibility.

The consequences of privatizing federal student loans could be significant. Private companies would likely focus on profitability, which could result in stricter repayment terms or less flexibility for borrowers seeking loan forgiveness or other relief options. This shift may reduce borrower protections, making it harder for students to challenge repayment terms or pursue loan discharges.

The Department of the Treasury and its Potential Role

If the U.S. Department of Education is restructured or eliminated, there is a possibility that the Department of the Treasury could step in to manage some aspects of the student loan portfolio. The Treasury is responsible for the country’s financial systems and debt management, so it could, in theory, handle the federal student loan portfolio from a financial oversight perspective.

However, while the Treasury has experience in financial management, it lacks the specialized knowledge of student loans and borrower protections that the Department of Education currently provides. For example, the Treasury would need to find ways to process complex Borrower Defense to Repayment claims, a responsibility ED currently manages. In 2023, over 750,000 Borrower Defense claims were pending, with thousands of claims related to predatory practices at for-profit colleges such as University of Phoenix, ITT Tech, and Kaplan University (now known as Purdue Global). Additionally, some of these for-profit schools were able to reorganize and continue operating under different names, further complicating the situation.

The Treasury could also contract out loan servicing, but this could increase reliance on profit-driven companies, possibly compromising the interests of borrowers in favor of financial performance.

Borrower Defense Claims and the Impact of For-Profit Schools

A large portion of the Borrower Defense to Repayment claims comes from students who attended for-profit colleges with a history of deceptive practices. These institutions, often referred to as subprime colleges, misled students about job prospects, program outcomes, and accreditation, leaving many with significant student debt but poor employment outcomes.

Data from 2023 revealed that over 750,000 Borrower Defense claims were filed with the Department of Education, many of them against for-profit institutions. The Sweet v. Cardona case showed that more than 200,000 borrowers were expected to receive debt relief after years of waiting. However, the process was slow, with an estimated 16,000 new claims being filed each month, and only 35 ED workers handling these claims. These delays, combined with the uncertainty around the future of ED, leave borrowers vulnerable to prolonged financial hardship. 

Lack of Transparency and Accountability in the System

While the U.S. Department of Education tracks Borrower Defense claims, it does not publish institutional-level data, making it difficult to identify which schools are responsible for the most fraudulent activity. 

In response to this, FOIA requests have been filed by organizations like the National Student Legal Defense Network and the Higher Education Inquirer to obtain detailed information about which institutions are disproportionately affecting borrowers. 

In one such request, the Higher Education Inquirer asked for information regarding claims filed against the University of Phoenix, a school with a significant number of Borrower Defense claims.

The lack of transparency in the system makes it harder for borrowers to make informed decisions about which institutions to attend and limits accountability for schools that have harmed students. If the Treasury or private companies take over management of the loan portfolio, these transparency issues could worsen, as private entities are less likely to prioritize public accountability.

Conclusion

The future of the U.S. student loan system is uncertain, particularly as the Department of Education faces the potential of funding cuts, staff reductions, or even complete dissolution. If ED’s role diminishes or disappears, the Department of the Treasury could take over some functions, but this would raise questions about the fairness and transparency of the system.

The possibility of privatizing the student loan portfolio also looms large, which could shift the focus away from borrower protections and toward financial gain for private companies. For-profit schools, many of which have a history of predatory practices, are responsible for a disproportionate number of Borrower Defense claims, and any move to privatize the loan portfolio could exacerbate the challenges faced by borrowers seeking relief from these institutions.

Ultimately, there is a need for greater transparency and accountability in how the student loan system operates. Whether managed by the Department of Education, the Treasury, or private companies, protecting borrowers and ensuring fairness should remain central to any future reforms. If these issues are not addressed, millions of borrowers will continue to face significant financial hardship.

Maximus AidVantage Contracts with the US Department of Education Publicly Available

The Higher Education Inquirer has received all the current contracts between the US Department of Education and Maximus/AidVantage through a Freedom of Information Act (FOIA) request. Maximus serves millions of student loan debtors and has faced increased scrutiny (and loss of revenues) for not fulfilling their duties on time. 

The FOIA response (23-01436-F) consists of a zip file of 998 pages in 5 separate files. HEI is sharing this information with any news outlet or organization for free, however we would appreciate an acknowledgement of the source. 

We have already reached out to a number of organizations, including the Student Borrower Protection Center, the Debt Collective, the Project on Predatory Lending, the NY Times, ProPublica, and Democracy Now!  We have also posted this article at the r/BorrowerDefense subreddit. 

Seventh Quarterly Report under Settlement Agreement in Sweet, et al. v. Cardona (US Department of Education)

The latest report regarding Borrower Defense to Repayment settlements has been published. National Student  Loan Data System records indicate that discharges have been fully processed for at least 195,5908 Class Members eligible for relief. Refunds have been fully processed for at least 194,782 Class Members eligible for relief.  

Borrower Defense to Repayment is a debt forgiveness strategy for consumers if they believe they were defrauded by a school and can document that fraud. The Project on Predatory Student Lending (PPSL) has provided assistance to thousands of consumers defrauded by for-profit colleges and still offers help. 

For consumer support regarding about Borrower Defense claims, we also recommend joining the r/Borrower Defense group on Reddit.  

U.S. Department of Education Announces Official Release of 2025–26 FAFSA Form

The U.S. Department of Education (Department) today officially released the 2025–26 Free Application for Federal Student Aid (FAFSA®), 10 days before its Dec. 1 goal. The online FAFSA form is available to all students and families at fafsa.gov, and the Department is processing submissions and sending them to schools. The paper form is also now available for students to submit.

Over the last several months, the Department has incorporated feedback from students, parents, schools, community-based organizations, and other partners into the FAFSA process and comprehensively tested the FAFSA form, system, and user supports at scale through a rigorous beta testing period. Since Oct. 1, through four rounds of testing, more than 167,000 students have submitted the online 2025–26 application; the Department has processed these forms and sent records to more than 5,200 schools across all states. The Department also tested the application with a variety of student groups—including those who faced particular challenges last year—and engaged with different colleges and universities, software vendors, state agencies, and federal partners to test FAFSA data and systems.

"I'm pleased to announce that after four successful rounds of beta testing, the 2025–26 FAFSA form is now available to all students and families,” said U.S. Secretary of Education Miguel Cardona. “After months of hard work and lots of feedback from students, schools, and other stakeholders, we can say with confidence that FAFSA is working and will serve as the gateway to college access and affordability to millions of students. Already, over 650,000 more applicants are eligible for Pell Grants, and more students are receiving Pell Grants, this school year compared to last year. We stand ready to help millions more students complete the FAFSA and get the financial aid they need to pursue their dreams of a college education.”

The Department has taken steps to modernize internal systems and processes, address issues in the FAFSA system, and put in place features that further enhance the user experience and improve functionality of the form. In addition, the Department released and updated resources and materials to help students and families better navigate the FAFSA form and process.

“We need a better FAFSA form to deliver financial aid to students going to college and other forms of education after high school,” said U.S. Under Secretary of Education James Kvaal. “Thank you to everyone who has helped the 2025–26 FAFSA launch successfully and ahead of schedule, including students and families, Department staff, and financial aid administrators and counselors across the country.”

For those who need additional assistance, the Department significantly increased staffing at the Federal Student Aid Information Center (contact center) by adding more than 700 agents since January and an additional 225 agents over the next few weeks for ongoing surge support. In anticipation of high demand as part of the official release of the FAFSA form, this week, the Department added extended FAFSA-only weeknight and Saturday contact center hours. Despite that, the Department cautions users that, during some surge periods, callers may temporarily experience longer than usual wait times. The Department will continue to add agents in the coming weeks to further support the 2025–26 FAFSA cycle.

“The 2025–26 FAFSA form that we officially released today is the same form that has been live for the past 7 weeks for the more than 140,000 students who successfully submitted applications. Our comprehensive beta testing with community-based organizations, high schools and school districts, colleges and universities, software vendors, and state agencies across the country follows industry best practices and has given us the confidence that our systems are ready,” said FAFSA Executive Advisor Jeremy Singer.

The FAFSA form and system are in a strong position, but the Department will continue working to ensure every student has the help they need to access higher education. In the coming days and weeks, the Department will carefully monitor the 2025–26 FAFSA form, as well as the contact center, and make any needed adjustments to improve the experience for students, families, and the financial aid community. The Department will begin processing paper forms by early December. In the coming months, the Department will further enhance the user experience and release additional functionality, including batch corrections and paper corrections, to facilitate a smoother process for students, families, and institutions.

The Department looks forward to continuing its work with partners to ensure that all students and their families can easily access the FAFSA form, have timely and clear information, and can quickly complete the application and access aid.

Additional Resources for Students, Families, and Partners

The Department has taken actions to significantly improve the Federal Student Aid Information Center’s contact center experience for students, families, and institutions, including to support the official release of the 2025–26 FAFSA form. These improvements include: Increasing staffing by nearly 80%. Since January, we have added more than 700 agents to the contact center.
Coordinating with the vendor team to ensure all agents, including those typically assigned to back-office processing, are trained on FAFSA to allow for an "all hands on deck" approach if needed.
Adding 225 agents over the next few weeks, in addition to the 700 agents who have already been added, for ongoing surge support, enabling extended hours of operation.
Implementing hold time announcements to inform callers of current wait times, giving them the option to hold or call back during less busy hours.

In addition to normal operating hours, found on StudentAid.gov, students and families will have access to FAFSA-only hours at the contact center that include evenings and weekends. The expanded hours begin Nov. 22, 2024 and will extend through Mar. 2, 2025. Students and families can reach agents at the contact center in English or in Spanish. Interpretation services in additional languages can be accessed here at StudentAid.gov.

Day(s) Regular Contact Center Hours FAFSA-only Support Hours
Monday 8 a.m.–9 p.m. ET Available until 10 p.m. ET
Tuesday & Wednesday 8 a.m.–8 p.m. ET Available until 10 p.m. ET
Thursday & Friday 8 a.m.–6 p.m. ET Available until 10 p.m. ET
Saturday Closed Noon–5 p.m. ET
Sunday Closed Closed

Notes: The contact center is closed on all federal holidays. On Friday, Nov. 29, 2024, the contact center will operate during regular hours and will not provide expanded FAFSA-only support hours.

The Department has recently released a suite of resources to assist students and families in completing and submitting the FAFSA form during the 2025–26 cycle, including:“Who’s the Parent on the FAFSA Form?” Wizard—A new, stand-alone tool to help students and families determine who will need to provide contributor information on the 2025–26 FAFSA form prior to starting the application.
“Creating Your StudentAid.gov Account” Page—A new resource that explains what families and partners need to know about creating a StudentAid.gov account.
Pro Tips for Completing the FAFSA Form—Updated tips for preparing to complete and submit the FAFSA form. This resource will also be linked from the StudentAid.gov Dashboard to promote easier access for students and their required contributor(s).
Federal Student Aid Estimator—The tool provides an estimate of the 2025–26 Student Aid Index and Federal Pell Grant eligibility calculation.
Federal Student Aid YouTube Channel: FAFSA Videos—Updated videos to help students and families understand the importance of the FAFSA form, who is a FAFSA contributor, and what happens after submitting the form.

Throughout the fall, the Department has released resources to assist our partners to help students and families prepare for and navigate the 2025–26 FAFSA cycle, including: 2025–26 Counselor Resource for Completing the FAFSA Form—The resource provides counselors and advisors with information and resources to help guide students and their families through the FAFSA form.
2025–26 FAFSA Roadmap—The tool highlights key dates for the FAFSA form launch, as well as timelines for the release of resources to assist our partners.
2025–26 FAFSA Preview Presentation—The resource provides financial aid administrators, advisors, and counselors with reference tools for staff trainings and financial aid nights. The presentation deck contains screenshots which highlight changes to the online 2025–26 FAFSA form.
2025–26 FAFSA Prototype—The tool provides the financial aid community an opportunity to gain a deeper understanding of the FAFSA user experience.

Updated information and outreach tools for counselors, college access professionals, and other advisors can be found in the Financial Aid Toolkit.

Sweet v Cardona Borrower Defense Update

The most recent update to the Sweet v Cardona Borrower Defense to Repayment case is here.  This video was taped September 26, 2024.  A transcript of the meeting is also available. 

According to Rebecca Ellis of the Project on Predatory Student Lending, "we think that this is substantial compliance in our eyes with the August 31st deadline. It's a very small number of loans still outstanding that have these particular complications."  About 870 loans from the automatic relief group are still awaiting discharge. However, several thousand refunds are still awaiting processing from the US government and student loan servicers. 

Student loan debtors have a community on Reddit at r/BorrowerDefense where more than 12,000 members exchange information and provide support. 

Student Loans in the US: A Trillion Dollar Tragedy (Glen McGhee)

Adam Looney and Constantine Yannelis have reopened their research on the student loan mess with a new paper from Brookings titled "What went wrong with federal student loans?" The paper talks about what went tragically wrong with student loans in the United States from 2000 to 2020. 

Here are the key points:

1. More people started going to college, especially those who didn't have a lot of money or whose parents didn't go to college. [See note below]
2. To pay for college, many of these new students had to borrow money from the government through student loans.
3. A lot of these new students went to for-profit schools. These are schools that are run like businesses to make money, unlike regular public or non-profit colleges.
4. The problem is that many of these for-profit schools didn't provide a good education. Their students often didn't graduate or couldn't find good jobs after finishing school.
5. Because these students couldn't get good jobs, they had trouble paying back their loans. This caused a big problem for the government and the students.




Now, let's look at Figure 3 Panel B:
This graph shows how many first-generation college students (students whose parents didn't go to college) enrolled in different types of schools. The schools are grouped by how well their students could repay loans. The red line at the bottom represents the best schools - where students usually paid back their loans easily. You can see this line barely goes up over time. The dark blue line at the top represents the worst schools - where students had the most trouble paying back loans. This line goes way up, especially after 2000.

What this means is that a lot of first-generation students, who often didn't have much money to begin with, ended up at the schools where they were least likely to succeed and most likely to have trouble with their loans.

The for-profit schools took advantage of this situation. They aggressively recruited these students, knowing they could get money from government loans. But they didn't focus on giving students a good education or helping them get jobs. Instead, they just wanted to make money for themselves.

This led to a big increase in student debt problems, especially for students who were already at a disadvantage.

Note: This statement refers to trends in college enrollment that occurred in the early 2000s through about 2012. Let me explain the reasons behind this trend and whether it's still true today:

Reasons for Increased College Enrollment
1. Policy Changes: Starting in the late 1990s, policymakers weakened regulations that had previously constrained institutions from enrolling aid-dependent students[1]. This made it easier for more people to access federal student aid and enroll in college.
2. Economic Factors:
- The persistently high return to college education over the last several decades increased demand for higher education[1].
- During economic downturns like the 2001 recession and the Great Recession starting in 2007, the opportunity cost of enrollment was low due to weak labor markets[1].
3. Supply Expansion: The supply of programs surged, particularly open access institutions, online programs, and graduate programs[1]. Many of these new programs were targeted at non-traditional student populations.
4. Demographic Shifts: Between 1990 and 2010, the number of high school graduates increased by 34%[1].

Is it Still True?
The trend of increased college enrollment, especially among disadvantaged groups, has partially reversed since its peak:
1. Overall Enrollment: By 2020, total undergraduate enrollment had declined back to near its level in 2000[1].
2. Demographic Changes:
- Black undergraduate enrollment in 2020 remains only modestly higher than in 2000 - about 10% greater[1].
- White undergraduate enrollment in 2020 was below its level in 2000[1].
- Hispanic enrollment almost doubled between 2000 and 2020[1].
3. First-Generation Students: While 60% of postsecondary students were first-generation in 2000, this share declined to 56% in 2020[1].
4. For-Profit Sector: Enrollment at for-profit institutions, which had surged between 2000 and 2012, has since declined significantly[1].

In summary, while there was a significant increase in college enrollment, especially among disadvantaged groups, from 2000 to 2012, this trend has partially reversed in recent years. However, some changes, like increased Hispanic enrollment, have persisted. The overall landscape of higher education enrollment continues to evolve, influenced by economic conditions, policy changes, and demographic shifts.

Citations:
[1] https://ppl-ai-file-upload.s3.amazonaws.com/web/direct-files/238393/f60f1373-2266-45ed-8960-6656ba110b38/paste.txt
[2] https://www.brookings.edu/articles/first-generation-college-students-face-unique-challenges/
[3] https://www.capturehighered.com/client-blog/landscape-in-flux-2024-enrollment-trends/
[4] https://medicat.com/why-first-gen-college-students-need-extra-support/
[5] https://www.insidehighered.com/news/2019/05/23/pew-study-finds-more-poor-students-attending-college
[6] https://www.forbes.com/advisor/education/online-colleges/first-generation-college-students-by-state/
[7] https://nces.ed.gov/programs/coe/indicator/cpb/college-enrollment-rate