The Education Department is planning to offload its student loans office, working rapidly to stand up a new independent agency that would take over what has long been a core part of the department’s mandate, according to three sources familiar with the matter and internal documents reviewed by The Washington Sun.
The Trump administration plans to spin off the Federal Student Aid office by Oct. 1, 2027. Richard Lucas, the office’s chief operating officer, is spearheading the change with the White House’s Office of Management and Budget.
If carried out, the plan would reshape how 45 million borrowers repay the $1.6 trillion currently in the Education Department’s portfolio of outstanding debts. It would also raise additional legal complications around the future of the department — an agency President Donald Trump and Secretary Linda McMahon have repeatedly said they want to eliminate entirely.
Current federal law requires FSA to remain within the Education Department. The office is the agency’s largest component.
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Inside the Education Department, officials are concerned that the Trump administration is rushing this major overhaul without considering the consequences to families and colleges around the country.
The department’s senior leaders have told staff that student financial aid can be managed more effectively as an independent agency, but current and former officials said the department is taking a chaotic approach that is setting it up for failure. Details of the latest potential offloading remain scant, said one official involved in the planning.
FSA “does not know how to be independent,” that official said, because it currently relies on the Education Department for such a significant portion of its operations.
“They think they’re just going to do it,” the official said. “Their plan is basically just a cartoon.”
The Education Department has taken a variety of steps over the last 20 months to accomplish what McMahon has labeled its “final mission,” including laying off or pushing out half of its workforce, curbing grant spending and signing more than a dozen agreements with other federal agencies to transfer out key responsibilities. It signed one of those agreements earlier this year for the Treasury Department to absorb the servicing of delinquent student loan debt, though those changes are still underway. FSA has 800 employees after shedding 43% of staff since Trump took office.
Melanie Storey, a former FSA director of policy implementation and oversight who now leads the National Association of Student Financial Aid Administrators, said the plan struck her as unrealistic.
“October of 2027, I mean come on,” Storey said. “This is extraordinarily complex work.”
The Federal Student Aid office, established in 1965, was made into the government’s first “performance-based organization” in a law passed under former President Bill Clinton. The law was designed to give the office more flexibility in hiring, procurement and some other operations, but it firmly established FSA as an office “subject to the direction of the [Education] secretary.” The department, not FSA, is responsible for all policy and regulatory decision-making relating to student financial assistance.
The Education Department has acknowledged internally that separating FSA into an independent agency would require an act of Congress, though the department officials and congressional staff said it has yet to engage Capitol Hill. It has also yet to discuss the matter with the Treasury Department, despite its critical role in paying out the loans.
Ellen Keast, an Education Department spokesperson, said this story was “fake news” but declined to specify what was incorrect.
The department “is engaged in an effort to restore FSA as a performance-based organization — not a political tool,” Keast said in a statement. “The Biden Administration weaponized FSA to punish colleges and universities it simply did not like — whether that be based on their tax-status or religious affiliation — and implement illegal loan forgiveness schemes.”
The Treasury Department did not respond to a request for comment. OMB called The Sun’s reporting “inaccurate” but did not elaborate or offer further comment.
The rushed process has made some inside the agency question whether they are still helping to fulfill its mission.
“There’s a difference between doing your job and colluding with someone to destroy your own agency,” the current official said.
Sen. Tammy Baldwin (D-Wisconsin), the top Democrat on the Senate Appropriations Committee panel that oversees the Education Department, said the push at FSA is just Trump’s latest effort to shut down the department without concern for “how much it hurts students, families and public schools.”
“I am all for working to make higher education more affordable, ensure folks are not saddled with debt for their whole life, and fix our deeply broken system for paying for higher education — but that is just not what the Trump administration is trying to do here,” Baldwin said. “This is just another illegal move by the administration in pursuit of destroying the Department of Education because they thought it sounded good on a bumper sticker.”
FSA is responsible for allocating $120 billion in loans and grants per year, though the Education Department — rather than FSA itself — facilitates the actual transfer of funds from Treasury to borrowers.
Education officials are contemplating how an independent FSA can set up its own budget shop, conduct its own audits and investigations of colleges and universities and run its own back-end offices such as human resources and procurement — all functions currently handled at the departmental level. The department is scheduled to present its plan to OMB next week.
Lucas, the FSA COO, told staff about the upcoming change in late September and declined to take questions, according to one person briefed on the matter.
On Sept. 30, the Education Department awarded a two-year contract to Accenture worth up to $337 million to provide digital services for FSA borrowers. An agency official said the department is rushing to get contracts out the door while it still has departmental support to enable FSA to transition to an independent entity more smoothly.
Watchdogs and researchers have for years suggested improvements to the administration of federal student aid, but those recommendations have encouraged more departmental oversight of the program, not less.
Ben Miller, who served in senior Education Department roles in both the Obama and Biden administrations, and Jason Delisle, a former Capitol Hill staffer who now serves as senior advisor for the department under McMahon, said in a 2019 report that Congress and the department needed to set clearer goals for FSA and to hold it accountable for its performance.
Policymakers must “acknowledge the importance of encouraging close, productive interpersonal dynamics between senior officials at the Education Department and FSA staff,” they said, adding it “must start acknowledging the importance of FSA through more meaningful and active management.”
Storey said she was concerned the department was rushing in pursuit of an arbitrary timeline.
“The risk here is we don’t do it carefully and we break the reliability and feasibility needed to serve those communities and those families,” she said. “Is reform something we can consider? Sure, but let’s not try to put an artificial deadline on it and drive it through.”
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