The Impact on Student Loans If the Department of Education (ED) Shuts Down

In recent weeks, President Donald Trump has renewed his efforts to dismantle and defund the U.S. Department of Education (ED), picking up the argument against what he and his administration view as federal overreach and wasteful spending. 

While the legality of this push to eliminate the ED is still being considered, it’s raised questions among families, educators, and others.

What happens if the Department of Education closes entirely? How does this impact federal student loans, existing repayment plans, and future aid access? Will it affect those with private student loans?

Here, we’ll explore how potential disruptions to the ED could affect existing student loans and financial aid for current and prospective college students. 

Key Takeaways

• President Trump cannot completely shut down the Department of Education without congressional approval, and it’s unknown if that will occur.
• The Trump administration has significantly reduced ED headcount, slashed funding, and refocused department goals.
• Student loans will continue to exist, but oversight of them may shift to the Department of the Treasury or Small Business Administration.
• Students should still file the Free Application for Federal Student Aid (FAFSA) as soon as possible to help find financial aid, including Pell Grants and other funding.
• Private student loans are not likely to be impacted by these changes.

Can the Trump Administration Shut Down the Department of Education?

Technically, no. At least not without assistance from Congress. As a cabinet-level agency, only Congress can abolish the ED.

But an outright shutdown of the agency differs from significant defunding and restructuring, which is what the Trump administration (through the Department of Government Efficiency (DOGE) and new education secretary Linda McMahon) is currently doing. At President Trump’s direction, about half of the ED’s staff has been fired, its education-research arm has been heavily scaled back, and the focus of its civil rights division has been substantially reduced.

That’s significant disruption for an organization that oversees the performance of American students, conducts important research into educational trends, and helps administer vital financial aid programs to students, such as Pell Grants and federally subsidized loans.

Eliminating (or significantly shrinking) the Department of Education has long been a policy priority for Republican lawmakers, especially during the Trump administrations. These sweeping personnel and budget cuts are among the initial steps in a contested effort.

What Will Happen to Student Loans If the Department Shuts Down?

According to recent reports, President Trump proclaimed that oversight and management of the federal student loan portfolio—nearly $1.7 trillion in loans for nearly 43 million borrowers—will shift from the ED office of Federal Student Aid (FSA) to the Small Business Administration (SBA). There’s also the potential that those loans may end up in the hands of the Treasury Department, although some Republicans oppose that move—or have at least expressed hesitation.

What does that mean for borrowers who already have loans? 

Well, first: You still have loans, and they still need to be paid. But some federal loans are already in a state of limbo. Until recently, nearly 8 million federal borrowers have not been making payments because a judge has frozen their Biden-era repayment plans. 

Income-driven repayment (IDR) plans—which base monthly student loan payment amounts on income and family size—were also briefly paused, but as of March 26, FSA announced those applications are now open. Some income-driven plans can be as low as $0 and are usually a percentage of your discretionary income, so it’s worth staying informed about them if you find yourself having difficulties paying.

In addition, there is uncertainty about the SBA’s capacity to manage these loans; the agency recently announced plans to cut its workforce by more than 40%.

The timeline for this transition is also in doubt. While President Trump insisted the SBA restructure would happen immediately, the FSA’s role as loan administrator is protected by law. This means Congress must act to enact the changes, but it remains to be seen if congressional support for the sweeping reorganization is there.

Would FAFSA Still Exist If the Department of Education Doesn’t?

Current borrowers are not the only ones concerned about the ED’s future. Future students and their families want answers, too, especially regarding FAFSA—the application for student aid that more than 9.9 million students fill out each year. Completing the FAFSA helps identify grants and federal loan opportunities available to help meet the increasing costs of college. In the face of an ED shutdown, what would happen to it?

Even if the ED is eliminated, many experts don’t think there’s an immediate risk of losing FAFSA access. The 2024-2025 FAFSA delays underscored the form’s importance and led to significant problems for students and colleges. Eliminating the form would pose substantial logistical challenges and could lead to widespread issues. 

As it currently stands, there are no plans to end the FAFSA form completely. While that doesn’t mean there’s an immediate risk to FAFSA going away in 2025, student loan borrowers and prospective college students need to stay abreast of major changes to how the form is handled. 

Some experts even think that shifting FAFSA oversight from the ED to the Treasury Department might not make much difference.

No matter what happens, it’s important to continue filing the FAFSA form each year. Not doing so could put you at risk of missing out on important financial aid that can make college more affordable.

Would Private Student Loans Be Affected by a Department of Education Shutdown?

Unlike federally backed loans, private student loans and their borrowers won’t see significant changes due to disruptions in ED operations. The ED doesn’t oversee these loans, which means your loan servicing, payment schedules, and terms won’t change. 

The predictability of private loan servicing compared to federal loans could be a benefit to students and families who want to avoid confusion, especially for those shopping for cosigned student loans. 

Cosigned loans impact the student borrower’s credit as well as that of the person who helps them secure the loan. A more predictable loan servicing agreement reduces the risk of damage to both signers’ credit scores should a payment lapse due to miscommunication or other issues.

How You Can Prepare

The best way to prepare for significant policy changes is to have your records in order and stay calm. Download your FSA information to track your outstanding loan balances, payment amounts, and interest rates. Verify that your loan servicer’s emails are whitelisted and that your address and contact information are correct.

Remember, policy shifts take time, and you will have opportunities to prepare. No matter what happens if the Department of Education closes, keeping detailed documentation can help protect you from miscommunication or disputes. 

If you’re considering student loans for the first time, knowing how to navigate the financial aid system can help reduce the risk of confusion regarding your loans and college costs. Follow Ascent or check out our blog for more up-to-date developments on how the changing financial aid landscape might impact your future.  

FAQs

Would an ED shutdown impact federal student loan rates or variable private loan rates?

Yes, in theory. If ED shuts down, the federal government may hand off student loans to private lenders or other state-run systems, such as the Treasury Department or SBA. These may offer different rate provisions or income-driven repayment options. Variable private loan rates, tied to market benchmarks, might shift depending on how the lending landscape changes.

Would college become more expensive if the Department of Education closed?

It’s possible. College expenses are increasing regardless of what happens to the Department of Education. Still, the agency plays a key role in distributing financial aid like Pell Grants and subsidized loans. Without it, states and private institutions could set their own financial aid policies, potentially widening the affordability gap. 

Oversight of for-profit schools could also weaken without consumer protections, which has historically proven problematic for students. For-profit schools typically aren’t subject to the same accreditation of other universities, which can put students at financial risk as they pursue degrees that may not get them the jobs they want.