The following Deep Dive details how the Trump Administration’s reported efforts to charge the Small Business Administration with oversight of federal student loans are illegal and would result in a major decline in quality of services for borrowers already facing tremendous economic uncertainty.
Authors: Michael Negron and Aissa Canchola Bañez
Jump to:
- Introduction
- Transferring Responsibility Over Student Loans Away from ED is Illegal
- SBA Has Significant Experience Running Loan Programs, but the Federal Student Loan Program Is a Different Animal
- Shifting the Student Loan Program Out of ED Will Put Millions of Vulnerable Borrowers at Risk
- Efforts to Shift the Student Loan Program Leave Us With More Questions Than Answers
- Conclusion
Introduction⬆
After a spring spent destabilizing the global economy, driving up borrowing costs, and sending the stock market into a roller coaster ride of ups and downs, the Trump Administration’s contempt for the more than 42 million Americans with student debt is another unnecessary economic risk that it is forcing onto the U.S. economy. These borrowers represent more than 15 percent of U.S. adults and owe $1.7 trillion in student loan debt to the federal government.
Earlier this month, experts at the University of California Student Loan Law Initiative released an analysis finding that 1-in-12 adults, or roughly 20 million, in the U.S. will be directly, negatively affected by the Trump Administration’s actions in the student loan market—warning of broader harm to communities and the economy at large.
The Trump Administration’s extreme agenda threatens to cause permanent damage to the finances of these Americans by cutting them off from the resources they need to get back on track. This includes dismantling the U.S. Department of Education (ED), blocking access to Income-Driven Repayment (IDR) plans for 2 million borrowers in need of more affordable monthly bills, and even potentially shifting oversight over the entire student loan program to either the Small Business Administration (SBA) or even the U.S. Department of the Treasury (Treasury), which are both ill-suited and ill-prepared to take on the complexities of running the program.
Even worse, the Trump Administration has proposed to make this change while implementing broad cuts to SBA and Treasury through Elon Musk’s Department of Government Efficiency, or DOGE. SBA in particular is undergoing massive cuts, with the Administration seeking to reduce its staff by 43 percent, or 2,700 employees, even as it continues to oversee a loan portfolio more than three times larger than its pre-pandemic levels. Similarly, DOGE has sought to cut staff at the Treasury, with thousands laid off (largely at the Internal Revenue Service) already and thousands more planned.
This Deep Dive evaluates the Trump Administration’s reported efforts to charge SBA with oversight of federal student loans in several ways. First, we assess the dubious legality of taking this action, creating more legal risk that will only muddy the waters further for students relying on federal financial aid to pay for college and student loan borrowers already weary of multiple court-imposed stops and starts to student loan programs. Second, we evaluate the readiness of the SBA to take on the $1.7 trillion federal student loan portfolio. And lastly, we discuss the risks of such a move to the millions of borrowers who are at risk of delinquency or default.
In mid-May, departing from a March announcement by President Trump of his intent to shift the student loan program to the SBA, ED Secretary Linda McMahon stated that she thought the federal student loan portfolio belonged with Treasury. This move would pose the same risks to borrowers as a move to SBA.
Transferring Responsibility Over Student Loans Away from ED is Illegal⬆
Transferring responsibility for the student loan program to the SBA or Treasury without an act of Congress is illegal. Under the Higher Education Act (20 U.S.C. § 1070 et seq), ED is given the authority to implement the student loan program. Congress specifically established the Office of Federal Student Aid (FSA) within ED and charged the Education Secretary to oversee the student loan program. Moreover, Congress has created numerous repayment options such as IDR, and relief programs including Public Service Loan Forgiveness (PSLF) and others intended to protect borrowers from a lifetime of debt, and explicitly tasked the Education Secretary with implementation. This includes if a borrower should experience a disability that prevents them from working or if a borrower is defrauded by their school.
On the other hand, the SBA and Treasury were each established for different purposes. The Small Business Act established the SBA to “aid, counsel, assist, and protect… the interests of small-business concerns in order to preserve free competitive enterprise [and] to insure that a fair proportion of the total purchases and contracts or subcontracts for property and services for the Government… be placed with small-business enterprises.” Similarly, Congress established the Treasury to perform a host of functions, largely related to the collection and management of federal revenue and expenditures. Against this statutory backdrop, the Trump Administration is on shoddy legal grounds if it seeks to implement this change by executive fiat, and doing so would require Congressional action.
SBA has Significant Experience Running Loan Programs, but the Federal Student Loan Program is a Different Animal⬆
The SBA has significant experience in overseeing lending programs, but these programs are fundamentally different from the $1.7 trillion student loan program. At present, the SBA loan portfolio consists of more than $450 billion in loans, up from the $132 billion it held annually for the five years prior to the pandemic. This big increase was driven by COVID-19 relief programs, the Paycheck Protection Program (PPP) and COVID-19 Economic Injury Disaster Loans (COVID-19 EIDL), which at their peak delivered just under $800 billion via PPP and $738 billion through COVID-19 EIDL. These programs represented unprecedented levels of lending for the SBA, which doubled its staffing level from 4,385 in March 2020 to 9,348 in March 2021. And while the SBA’s relief programs played a critical role in stabilizing millions of small businesses during an unprecedented global pandemic, the programs were also marred with visible cases of fraud, with the SBA Inspector General’s Office estimating that the agency had made more than $200 billion in potentially fraudulent loans.
SBA loan programs come in two forms. The predominant approach by the SBA has been to guarantee debt issued to small businesses by private lenders. The other approach taken by SBA through its disaster loan programs has been to offer direct loans to small businesses and homeowners in declared disaster area where the SBA is responsible for accepting applications, underwriting the loan, issuing the master promissory note and providing the funds, and then servicing the loan and interfacing directly with borrowers. Both approaches differ in significant ways from the federal student loan program.
Guaranteed Loans
Historically, SBA’s primary approach to offering capital access to small businesses is through loan guarantees—where the federal government commits to repaying lenders for a share of a loan in the event of default—to incentivize the offering of loans to borrowers who would otherwise struggle to obtain financing from the private market. The SBA’s signature 7a program is the chief example. Here, SBA offers banks and other private lenders a partial guarantee that can go as high as 90 percent. The small business only interacts with the lender, with the application, underwriting, promissory note, and customer service all provided by the private lender. If a borrower falls behind on payments, they must work with the private lender to restructure payments or seek other relief. This is quite different from the federal student loan program, where the borrower applies through the federal government before transitioning to a private servicer once they enter repayment. Even then, student borrowers continue to interact directly with the federal government through the StudentAid.gov portal and frequent communications from ED.
In 2024, the SBA’s 7a program guaranteed $31.1 billion in SBA-guaranteed loans to about 70,200 borrowers. During the pandemic, Congress established the PPP within the 7a program, offering 100 percent guaranteed loans—meaning lenders had no credit default risk—that could be forgiven for borrowers if certain criteria were met including a requirement that 60 percent of proceeds be spent on payroll. SBA approved nearly 12 million loan applications for $799 billion in PPP in 2020-21.
SBA Direct Loans
SBA also has a long history of making direct loans to small businesses and homeowners through its disaster loan programs. Access to these programs is triggered when a given county is declared a federal disaster loan, typically triggered at the request of the governor of a state affected by a hurricane, fire, earthquake, or other natural disaster. Once a disaster is declared, a small business can access disaster loans to make up for economic losses, such as a decline in receipts, or to repair structural damages. Homeowners can borrow up to $500,000 for real estate repairs or replacement and up to $100,000 for personal property losses not covered by insurance or grants from the Federal Emergency Management Agency. Terms are generous, typically the borrower can access a 30-year loan with an interest rate in the low single digits. The borrower’s primary point of contact is with the SBA at every stage of the process, from application to disbursement to servicing.
During the pandemic, the SBA launched the COVID-19 EIDL, a nationwide loan program that provided $378 billion in loans to more than 3.9 million businesses. Through COVID-19 EIDL, SBA delivered more capital over the roughly 22 months of the program’s life than SBA had provided in disaster loans over the entire nearly 72-year history of the SBA. COVID-19 EIDL borrowers who become delinquent on their loans or default have limited options for relief, as the Trump Administration closed the Biden Administration’s hardship program, which allowed borrowers to remain current as long as they made a payment of any size (though interest still accumulated).
Federal Student Loans
Through the federal student loan program, ED makes loans directly to students to finance their postsecondary educations. The federal student loan program, run by FSA, is now a direct loan program, after four decades operating as a guarantee program like SBA’s 7a program. It should be noted that Congress explicitly chose to transition the federal student loan program away from the loan guarantee model after a long history of scandals, as private lenders, guarantee agencies, and schools worked to profit off students and the loan system. When the 2008 financial crisis struck, Congress was forced to bail out Sallie Mae and other major participants in the guaranteed student loan program, putting the government on the hook for hundreds of billions of dollars in guaranteed student loans. Ultimately, the 2008 student loan bailout demonstrated that the government could hold and service a large portfolio of federal student loans, bolstering the case that ED should transition the student loan system away from loan guarantees and towards a 100 percent direct lending model—a framework that Congress enacted in 2010.
Unlike other loan products, the federal loan program acts as a tool to expand access to a higher education, therefore, students do not face minimum credit score requirements, and apply for loans directly using the Free Application for Federal Student Aid (FAFSA) at StudentAid.gov. Once a borrower enters repayment, their loan is passed on to one of five student loan servicers, non-governmental entities responsible for managing accounts, processing payments, providing information about repayment options (including IDR plans), and offering customer service. In the 2024 fiscal year, the program provided $91.58 billion through 13 million loans, an average of about $7,000 per loan.
Key Differences Between the Programs
While SBA has significant experience in overseeing loan programs, the federal student loan program is significantly larger and more complicated with borrowers who are entitled to a higher-touch level of servicing support than those in the small business programs. Key differences include:
- The federal student loan portfolio is nearly four times the size of the current post-pandemic SBA loan portfolio and nearly 16 times larger than its historic portfolio. At $1.7 trillion, the student loan portfolio dwarfs the SBA’s $450 billion loan portfolio, which was inflated well beyond its historic average of about $130 billion.
- Federal student loan borrowers have many more repayment options than traditional SBA borrowers. While SBA borrowers have few options for relief if they struggle to make payments, Congress established a robust student loan safety net with an array of consumer protections, pathways to cancellation, and the right to choose from a complex array of repayment options depending on their income level. Over the years, servicers have failed to provide student borrowers with accurate information about these options, underscoring the need for effective oversight. The Trump Administration’s recent wave of mass firings has exacerbated deficiencies in oversight.
- Federal student loan borrowers require higher-touch servicing than small business borrowers. Both student borrowers and SBA borrowers face significant consequences from default, including reduced credit scores, garnished wages and benefits, and more. Unlike student loans, which are intended to provide access to a higher education to students regardless of their financial circumstances and credit profile, SBA’s programs generally have credit score minimums. Thus, if tasked with overseeing student loans, SBA would take on the responsibility with limited experience in serving borrowers that require a significant level of higher-touch servicing, or conducting the robust oversight needed to ensure student loan servicers are adequately supporting student borrowers.
- Servicer oversight is a critical function performed by ED, and SBA has no analogous experience. Given the important role of student loan servicers, and a long history of documented servicing failures, oversight and accountability are important functions and responsibilities of FSA. During the Biden Administration, FSA announced a series of oversight and accountability measures that resulted in servicers seeing payments withheld for failing to comply with their contractual obligations. Unfortunately, recent efforts to dismantle ED and illegally fire thousands of ED employees will make this ongoing oversight and accountability work impossible—potentially allowing servicer failures and misconduct to run rampant, which could push borrowers further into delinquency and default. On the other hand, SBA directly services its portfolio of several million disaster loans, the vast majority of which are COVID-19 EIDL—a portfolio vastly smaller and less nuanced than the federal program. Guaranteed loans are serviced by the private lender, with variation in approaches to borrowers who struggle with payments.
Shifting the Student Loan Program Out of ED Will Put Millions of Vulnerable Borrowers at Risk⬆
The Trump Administration’s attempt to move the student loan program outside of ED comes at a particularly vulnerable time for the more than 40 million student borrowers, with 1-in-12 adults at particular risk of harm. This includes more than 6 million borrowers in default on their student loans and another 7 million behind on their loans. Also at risk are the 8 million borrowers enrolled in the Saving on A Valuable Education IDR plan, which has been derailed by litigation filed by right-wing state attorneys general. Soon after taking office, the Trump Administration halted all IDR application processing, resulting in 2 million applications submitted by borrowers desperately seeking affordable monthly payments going unprocessed. Overall, only 40 percent of student borrowers are current on their payments. The entire student loan population is still emerging from the pandemic-related pause on payments and interest under both Presidents Trump and Biden, which lasted more than three years and then included an additional one-year transition period where borrowers faced no adverse credit consequences for missed payments that ended September 30, 2024.
As laid out above, while SBA has extensive experience in overseeing lending programs, the federal student loan program operates at a scale and complexity that is beyond SBA’s current capacity to execute well. SBA had limited direct interaction with PPP borrowers, with lenders serving as the primary point of contact for questions or repayment issues. With respect to the millions of COVID-19 EIDL borrowers, SBA directly serviced those loans and interfaced with borrowers on repayment questions. But the student loan program requires a higher level of contact with borrowers than SBA’s direct loan programs, like disaster loans or COVID-19 EIDL.
Clear and frequent communication with student loan borrowers is critical because understanding payment options can be challenging, and there is a long history of servicing failures and abuses that have required intervention by FSA or the Consumer Financial Protection Bureau. This includes a decade-long scheme to steer borrowers away from affordable loan repayment options and towards short-term, higher-cost forbearances—a practice that attracted lawsuits from state attorneys general and federal financial regulators and ultimately led the Secretary of Education to cancel more than $50 billion in debt owed by more than 1 million affected borrowers.
Any effort to pursue this change by the Trump Administration would shift the task of overseeing the student loan servicing industry to the SBA. Absent an influx of significant resources, this shift creates significant risk for borrowers for several reasons. The Trump Administration has dismantled FSA, laying off 600 employees, eliminating expertise in both the student loan program and in federal contracting and oversight processes. This destruction of FSA happened without a clear plan to shift any of that expertise over to SBA, which would be charged with overseeing servicer contracts, borrower communications, and more. At the same time, the Trump Administration announced the firing of 43 percent of the SBA workforce, or roughly 2,700 employees, to a staffing level not seen since before the pandemic, when the loan portfolio for the agency was 16 times smaller than it will be following the shift of the student loan program. These cuts will severely stress the ability of SBA to service its existing portfolio of loans, especially the COVID-19 EIDL portfolio, let alone take on an additional $1.7 trillion in new student loans.
An alternative to the SBA recently raised by ED Secretary McMahon, Treasury, is no improvement. In fact, Treasury may be a worse choice because the agency has very little experience in direct supervision of the origination or servicing of loans. The department has a long track record of awarding grants and tax credits to states, community development financial institutions, and other nonprofit organizations, but as Treasury itself notes, this oversight does not extend to the individual loan level. The best example its limited experience is the 4003 Loan Program, created under the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, where Treasury provided approximately $2.7 billion in loans to 35 businesses concentrated in the air carrier, repair station, and other national security industries ensure liquidity in the face of losses incurred due to the pandemic. SBA, on the other hand, has extensive experience with both making direct loans to businesses and homeowners located in disaster areas as well as extending loan guarantees to loans made by lenders to small businesses.
Efforts to Shift the Student Loan Program Leave Us With More Questions Than Answers⬆
Amidst these firings and the fact that the Trump Administration has put forth no further details on how they would propose any transition of oversight of the program to the SBA or Treasury, several questions come to the forefront.
- Who at SBA/Treasury would hold servicers’ feet to the fire to ensure that borrowers receive the best information about their repayment options?
- How would SBA/Treasury plan to support borrowers already in delinquency and prevent them from defaulting?
- When servicers make mistakes, will SBA or Treasury staff have the know-how to spot errors and ensure corrections are made?
- Will SBA or Treasury also oversee the servicing of defaulted borrowers, who in a few short months could comprise roughly one-fifth of all borrowers?
- Does the Administration also envision charging SBA or Treasury with implementing the FAFSA and overseeing the disbursement of federal financial aid grants and loans each year? If so, what expertise does these agencies have in deploying such a critical responsibility?
The student borrower portfolio requires more hands-on management than traditional SBA loans, and the Trump Administration has provided no information about its supposed legal authority to enact this change, nor its plans to ensure that the right expertise is in place to manage any such transition.
Borrowers would bear the brunt of the risk should the Trump Administration attempt to shift the federal student loan program to SBA or Treasury, but there are risks to the U.S. economy as well. The 42 million student borrowers make up about 15 percent of adults, a significant portion of consumers. The one-fifth of borrowers likely to be in default in the coming months represents an additional drag on consumer spending at a time when the President’s erratic implementation of his sweeping tariffs regime is already causing consumer and small business confidence to plummet.
More borrowers will struggle with repayment as they have a harder time obtaining relief due to reduced service quality as a result of the Trump Administration’s widespread firings. The inability of SBA to adequately conduct oversight over student loans and potential Trump Administration changes in policy that reduce access or benefits from IDR programs and initiatives like PSLF. Multiple rigorous studies have found that increased debt loads are associated with a broad range of bad outcomes, including deterring entrepreneurship, and delaying marriage, homeownership, and having children.
Conclusion⬆
The Trump Administration does not have the legal authority to move the federal student loan program out of the ED. Should Congress take any action to do so, the SBA—nor the Treasury Department for that matter—is not prepared to take on the $1.7 trillion student loan portfolio, and the resulting decline in quality of services that borrowers can expect could not come at a worse time. With 6 million borrowers already in default, and 7 million more well on their way, this transition is a recipe for chaos and misinformation. For an Administration already facing tremendous economic headwinds for its reckless trade policies, playing with the financial well-being of 42 million borrowers is too big a risk to throw into the mix. With both Republicans and Democrats skeptical about the wisdom of this move, Congress should present a bipartisan front in demanding more details on the plan from the Trump Administration and opposing this ill-conceived move.
Michael Negron is a Policy Fellow at Groundwork Collaborative. Before joining Groundwork, Negron served as Special Assistant to the President for Economic Policy at the National Economic Council where he worked on consumer protection issues, small business policy, and student debt relief. He previously served as Assistant Director for the Illinois Department of Commerce and Economic Opportunity under Governor JB Pritzker and Chief of Policy for the City of Chicago under Mayor Rahm Emanuel. Negron also served in the Obama Administration at the Office of Management and Budget and the U.S. Department of Defense.
Aissa Canchola Bañez is the Policy Director at SBPC. She brings a decade of experience in Congress, Executive Agencies and advocacy working to advance policy solutions to improve the lives of workers and families and create a more just and equitable society.