Trump privatizing student loans would spur higher-ed reform, lower costs: expert
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Since its inception in 1979, the U.S. Department of Education (DOE) has played a significant role in shaping federal student loan policies. These policies have greatly impacted the rising cost of education and the loans taken out to finance it. With President Donald Trump’s plans to downsize and eventually close the DOE, experts are suggesting that a fully private loan system may be more effective than transferring administration to other government entities.
Andrew Gillen, an expert from the Cato Institute, highlighted the history of federal student loan programs, mentioning the direct loan program introduced during the Clinton administration. He explained how the government shifted to exclusively issuing loans in 2010 with the implementation of Obamacare. Gillen emphasized that a private loan system would provide better incentives for universities and students, as private lenders prioritize repayment risk and discourage funding for unviable educational pursuits.
The Trump administration initially proposed transferring the $1.6 trillion student loan portfolio to the Small Business Administration (SBA), but recent developments suggest that the Treasury Department may take over federal student loans. Additionally, Pell Grants and Title I funding may be transferred to other federal agencies, reducing the DOE’s oversight of major educational programs.
Gillen noted that the current system encourages “bad investments” by funding education without realistic repayment expectations. Moving to a private system would hold colleges accountable for producing students capable of repaying loans and incentivize students to pursue fields with promising career prospects. He also suggested clarifying bankruptcy laws to encourage private lenders to provide student loans.
Efforts have been made by lawmakers to address the issue of discharging student loans through bankruptcy, with some proposing legislation to make private student loans dischargeable similar to other consumer debt. The government’s ability to garnish wages without a lawsuit has made loan repayment more efficient and less costly.
Income-driven repayment plans introduced in the 1990s allowed borrowers to repay loans based on their income, providing immediate relief but increasing long-term costs. As of fiscal year 2024, the DOE held $1.6 trillion in student loan debt, with billions allocated for undergraduate and graduate education.
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