What Happens to Student Loans If The Department of Education is Abolished?

If the Department of Education is abolished, the future of PSLF, income-driven repayment, and Borrower Defense depends on who takes over the federal loan portfolio and whether Congress rewrites the Higher Education Act. Borrower protections survive transfers under current law, but privatization faces major legal and financial barriers.

Understanding what happens next requires examining how federal law treats loan contracts and borrower protections when the agency responsible for administering them is removed.

Abolishing the Department of Education eliminates the entity that currently administers repayment, forgiveness operations, enforcement, servicing oversight, and Borrower Defense adjudication. But removing the agency does not eliminate the underlying loan contracts or the borrower protections embedded in federal statute.

Two statutory constraints define every shutdown scenario.

Borrower protections must remain enforceable

Under the Higher Education Act, any sold or transferred loan “shall be separately enforceable…in accordance with the terms” of the original agreement. That includes PSLF, IDR, disability discharge, death discharge, and Borrower Defense. Because these rights are written into statute and incorporated into promissory notes, they bind any successor agency or purchaser without exception.

Loans cannot be sold at a loss to the federal government

Federal law prohibits selling the portfolio below its assessed value. Private buyers rarely match the government’s valuation for long-term federal debt, particularly when they must honor repayment rights and discharge protections they cannot change or control.

A private lender cannot strip IDR or PSLF to cut costs. And because the federal government retains unlimited time to collect, the ability to seize tax refunds, and immunity from servicing-related lawsuits, the portfolio is intrinsically worth more to the government than to private investors.

The PPSL valuation analysis — conducted by the Project on Predatory Student Lending — underscores this point, arguing that these structural advantages produce a federal valuation higher than what private buyers would pay.

This is why lawmakers have already warned Treasury and Education officials against transferring debt ownership. In a recent letter, more than 40 Democrats argued that stripping protections would be unlawful and that selling the portfolio at a loss would violate the Higher Education Act.

Related: Education Department Begins Dismantling — What Changes Now

Abolishing the Department of Education triggers a multi-year transition affecting loan records, repayment systems, servicer contracts, and the underlying legal authority governing federal student aid.

During this period, borrower protections remain intact because they arise from statute and contract rather than from the agency that administers them.

A Treasury-run system is the most plausible outcome because it already manages federal debt collection, offsets, and long-term receivables. These activities positions Treasury to absorb the student loan portfolio without violating the legal requirement to maintain contractual protections or the prohibition on selling the portfolio at a loss. Keeping the loans within federal control also avoids the statutory barriers that complicate private ownership.

Privatization faces significant obstacles:

• Buyers must honor PSLF, IDR, and discharge rights.

• Buyers must pay the portfolio’s federal valuation.

• PPSL argues the portfolio is worth more to the federal government than to private investors.

• Lawmakers have already raised concerns that selling at a loss or stripping protections would be illegal.

Borrowers should expect uncertainty in IDR recertifications, PSLF payment counts, and discharge applications during the transition. But until Congress changes the Higher Education Act, federal repayment terms, forgiveness rules, and borrower rights continue to apply regardless of who holds the loans.