On March 21, President Trump declared a significant shift in the handling of federal student loans. The United States Department of Education's nearly $1.7 trillion student loan portfolio would be moved to the Small Business Administration (SBA). This transfer implies that borrowers would have to rely on the SBA for loan assistance and repayments.
However, this change won't happen instantly as it requires approval from Congress. Besides, the transfer could present problems to borrowers trying to stay on top of their loans, given the concurrent announcement that the SBA plans to reduce its workforce by 43%.
Tasked with services such as backing loans for small businesses, the SBA also had to manage COVID-19 relief programs. The result was a jump in its portfolio management from $143 billion to $1.2 trillion in pandemic aid. Now, the addition of student loans might significantly strain the SBA's resources, especially considering staff cuts.
Issues that plagued the COVID Lending Programs are a concern. They included an estimated $200 billion in potentially fraudulent allocations. These issues emphasized that the SBA might have struggled to cope with the torrent of pandemic-era pressure.
Previously, the SBA’s main focus was facilitating loans, not directly lending. The addition of student loans to its portfolio could lead to errors in loan management, slow customer service, and potentially jeopardouce borrowers' credit score.
Senior Vice President of the Institute for College Access & Success (TICAS), Jessica Thompson, warned that these changes could prove costly for borrowers and taxpayers due to erratic and inconsistent management of federal student loans.
Although it’s uncertain how the transfer will affect the federal student loan landscape, concerns about the SBA's capacity and experience to administer such a hefty amount of debt are valid.
Trump's administration might resolve these difficulties by changing the federal student loan model. Rather than direct lending, loans could be issued by private lenders with government backing, much like the SBA's business lending model. However, this switch might eliminate benefits such as access to debt forgiveness and discharge programs held by federal student loans.