The Trump administration has used interagency agreements to outsource a number of ED’s responsibilities to other federal agencies.
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The Trump administration has reportedly updated its plans for the Department of Education’s Office of Federal Student Aid.
FSA oversees more than $120 billion in student grants and loans annually, and ED is already offloading the oversight of some of its responsibilities to the Treasury Department through an interagency agreement. But The Washington Sun reported Thursday that the Trump administration is now looking to turn the ED’s largest office into a stand-alone agency by Oct. 1, 2027.
The department disputed the Sun’s report, calling it “fake news.” But the swift outcry over the report from Democratic lawmakers and college-access advocacy groups highlights ongoing concerns over the administration’s student loan policy and whether it can carry out its plans. The reported shift comes as FSA implements a sweeping overhaul to federal student loan policy. More than a year ago, Education Secretary Linda McMahon fired more than 320 FSA employees, or about 25 percent of the office’s staff.
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Regardless of whether FSA becomes an independent agency or moves to Treasury, experts say that, if not handled carefully, the transition could be a major disruption for thousands of institutions and tens of millions of students.
Trump’s latest plan for FSA, which the Sun said it confirmed through internal documents and three anonymous sources, would be led by Richard Lucas, the office’s chief operating officer, as well as the White House’s Office of Management and Budget. Lucas told FSA staff about the plan in late September but declined to take questions, according to the Sun.
ED’s current interagency agreement with Treasury outlined three phases. The first—putting Treasury in charge of collecting on defaulted loans—is underway. But neither department has provided much detail on stages two and three, which involve handing off nondefaulted loans and then providing operational support for the Free Application for Federal Student Aid and other functions. As part of this transition, FSA staff have already changed offices and are now working from the Treasury Department.
Ellen Keast, an Education Department spokesperson, declined to comment on what specifically about the Sun’s reporting was incorrect. But she pointed to the existing IAA, saying that “the Trump Administration is returning to the states and breaking up the federal education bureaucracy.”
The OMB also said that the reporting was “inaccurate,” and the Treasury Department did not respond to Inside Higher Ed’s request for comment.
Melanie Storey, president of the National Association of Student Financial Aid Administrators, who previously worked at FSA, said the reported plans appear to align with the third phase of the Treasury agreement. It would just mean that rather than effectively becoming an office of Treasury, FSA would serve as an independent bureau or subdivision that coordinates with both ED and Treasury. But the Sun says FSA would be an independent agency, not a bureau, and the IAA doesn’t explicitly mention either option. Congress would have to sign off on making FSA fully independent of ED.
A source familiar with the status of FSA, who spoke with Inside Higher Ed on the condition of anonymity, believes there is no substantive plan to make FSA independent, even as a bureau of Treasury. The source noted that FSA’s chief financial officer, Rhonda Shaffer, had been named the new head of Treasury Partnership just weeks ago and argued it wouldn’t make sense to change Shaffer’s job if the office was becoming its own agency. In the source’s view, this is just the Office of Management and Budget’s way of prompting ED and Treasury to move faster on their existing agreement.
Still, critics warned Thursday night that making FSA independent could cause significant disruptions that extend beyond the Pell Grant and student loans. FSA also oversees colleges to ensure they are complying with their obligations under federal law.
“When did creating an entirely new federal agency to do the exact same work that’s already being done equate to efficiency?” Sen. Patty Murray, a Washington State Democrat and vice chair of the Appropriations Committee, asked in a news release. “Tens of millions of Americans are depending on government to actually work here. Trump has already pushed out nearly half [FSA’s] staff—this intentional sabotage only threatens to create true financial chaos in people’s lives.”
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Advocacy groups and unions like Protect Borrowers and the American Federation of Teachers described FSA as an already “scandal-plagued student loan arm” and condemned the announcement as “a pointless distraction” from the existing “widespread” financial harm borrowers are facing.
This is not the first time anyone has floated the idea of turning FSA into a stand-alone agency. During the president’s first term in office, then–Education Secretary Betsy DeVos openly advocated for Congress to take student loan management off her list of responsibilities. DeVos pitched that the loans should be handed off to a “stand-alone government corporation, run by a professional, expert and apolitical board of governors.”
“Congress never set up the U.S. Department of Education to be a bank, nor did it define the secretary of education as the nation’s ‘top banker,’” DeVos said in 2019 at the department’s annual FSA training conference, according to Politico. “But that’s effectively what Congress expects based on its policies.”
The Heritage Foundation’s Project 2025, a set of policy recommendations for the second Trump administration, also suggested that the executive branch work with Congress and “spin off FSA and its student loan obligations to a new government corporation with professional governance and management.”
But current law requires the Education Department to manage all student aid authorized by Title IV of the Higher Education Act of 1965.
McMahon, who has vowed to shut down her own agency, has repeatedly acknowledged that only Congress can do so. Still, the administration has moved forward with a dozen interagency agreements to outsource certain programs and responsibilities. McMahon has described the agreements as a “proof of concept” to show Congress how education programs could continue without her department.
If ED moves forward with spinning FSA off into its own agency, the source familiar with FSA said they wouldn’t be entirely opposed to that plan. But it would require time and resources in order to be done well.
“It might be a good idea in theory,” the source said. “But building it from scratch just seems like a lot of effort.”
Storey from NASFAA said that regardless of whether ED plans to keep FSA as an office, turn it into a Treasury bureau or separate it as a fully independent agency, her concerns remain the same.
“Any reform, restructure or relocation of FSA's core functions must be done thoughtfully and with careful attention to minimize disruption in service to students and families,” she said. “That simply cannot be done in the proposed timeline.”