Chaos and Confusion: What Credit Unions Should Know About Trump’s DoEd Cuts

[00:00] Vince Passione: Hello, everyone. This is Vince Passione with a quick update to this episode featuring education expert Mark Kantrowitz. After we recorded our conversation, President Trump officially signed an executive order to dismantle the Department of Education. While this doesn’t mean an immediate shutdown, as that would require congressional approval, it does a signal significant shift in federal involvement in education.

[00:21] Vince Passione: For lenders, this creates both challenges and opportunities. The administration of federal student loans will be transferred to other agencies, leading to changes in loan servicing and also creating more space for private lenders in the education finance market. The immediate impact may be limited for borrowers with federal loans and Pell Grants continuing for now. However, proposals to eliminate PLUS loans after July 1st could increase demand for private student loans. Given these changes, financial institutions should provide clear guidance to borrowers and members, as there will be a lot of confusion around the situation. Please encourage them to stay informed about official announcements and prepare for potential delays in loan servicing. It may also be a good time for borrowers to review the repayment options and consider alternatives, including refinancing, especially if federal benefits become limited. However, remind them to be cautious about refinancing federal loans, which could mean losing potential federal benefits.

[01:14] Vince Passione: If Federal PLUS loans are eliminated, be ready to inform borrowers about private loan alternatives to help fill the gap, and remind them they should keep detailed records of all loan-related communications and transactions. It could also be valuable for them to seek professional advice to make informed decisions about their situations. Stay informed as this situation develops so you can effectively communicate with your members and borrowers. Thank you for listening, and I hope you enjoy the episode.

[01:42] Mark Kantrowitz: If the federal customer service functions are impacted, such as the Federal Student Aid Information Center, the credit unions may be able to help their members get answers to their questions. And that can be a great way of marketing to their members, saying, “We can help you, and yes, the federal PLUS loan has ended. We have products that can help you, and we can also answer your questions about student financial aid and student loans.”

[02:14] Narrator: Welcome to 22 Minutes in Lending, your go-to podcast for insights on all things lending, from lending practices, regulatory updates, how to enhance lending efforts and more. In each episode, Vince Passione connects with industry leaders to discuss the latest trends and happenings around the lending industry. Let’s dive in to the latest in lending.

[02:38] Vince Passione: Welcome to 22 Minutes in Lending. I’m your host, Vince Passione. Today we’re joined by Mark Kantrowitz, one of the nation’s leading experts on student financial aid, scholarships and education funding. With degrees from MIT and Carnegie Mellon, Mark has spent decades helping students and families navigate the complexities of paying for college. He’s been widely quoted in top publications, such as The New York Times, The Wall Street Journal and Forbes, and he’s authored several bestselling books on financial aid. Mark has also testified before Congress, and served on multiple
boards dedicated to education policy and financial literacy. We’re excited to have him here today to share his insights on student loans, college affordability, and the impacts of the most recent changes at the Department of Education. Mark, welcome to the podcast.

[03:22] Mark Kantrowitz: Thank you for having me.

[03:24] Vince Passione: So Mark, let’s jump right in. The Department of Education announced it’ll lay off 1,300 people. It looks like it’s about 50% of the workforce. So walk us through what was proposed for the DOE? What’s actually happened, what’s going to happen? And if there’s any way that there’s going to be some legal stance or legal response to the changes that have been asked for by the administration?

[03:44] Mark Kantrowitz: The US Department of Education was created by Congress in 1979, and only Congress can eliminate it. However, the president can eviscerate the US Department of Education, as seems apparent. Though, there’s some question about whether they can legally cut back on programs that were funded by Congress, that were mandated by Congress. So there may be some lawsuits trying to reinstate the employees.

[04:18] Mark Kantrowitz: Now, as far as the impact on, say, student loan programs and other federal student aid programs, it should be relatively minimal, because those are generally managed by independent contractors. And there has been no word about the Trump administration trying to get rid of those contractors as yet. So the students interact mainly with the contractors that are the loan servicers on the servicers’ websites.

[04:45] Mark Kantrowitz: However, there are some things that are handled in-house by the US Department of Education. For example, oversight over the loan servicers and the colleges is handled in-house. And the Trump administration just got rid of half of the local offices that handle the civil rights, and so that may be impacted.

[05:13] Mark Kantrowitz: The US Department of Education also handles final approval of loan forgiveness, so that may be impacted. And consider that during Trump 1.0, they slow-walked and ultimately didn’t approve very many borrowers who applied for the borrower defense to repayment. And Republicans have circulated a set of priorities for budget reconciliation. That include getting rid of or sharply  cutting back on loan forgiveness, such as the borrower defense to repayment, closed school discharge, and Public Service Loan Forgiveness. And President Trump has since issued an executive order relating to Public Service Loan Forgiveness.

[05:56] Vince Passione: So Mark, what do you think happens now? They took out 50% of the staff, so bloated or not, that’s a huge reduction. And we’ve discussed this prior to the call, and I’ve talked to other experts in the industry and they have the same opinion that you did. That there are things that are being done from servicing perspective outside by independent contractors. The FAFSA form and that process is, “on autopilot,”, although last year, I wouldn’t say it was autopilot. But what do you think the next 30, 60, 90 days look like? And as you talk to our audience, these are credit unions and community banks
that have customers and members that are going to be affected by this. What does the fall enrollment season look like for these borrowers that are applying for federal loans, and Pell grants and other things that rely upon the government to administer?

[06:49] Mark Kantrowitz: Right. So the customer service from the point of view of the colleges, is going to be sharply curtailed. And that may lead to some delays, especially if someone has an atypical problem. For people who are just file the FAFSA and get their financial aid, and don’t encounter any problems, they should be fine. It’s mainly borrowers who maybe have a complaint about their loan servicer that may be impacted, because a significant number of staff of the FSA ombudsman who responds to complaints have been gotten rid of.

[07:22] Mark Kantrowitz: I think that one of the areas in which credit unions excel, is in helping their members find answers to their questions. So if the federal customer service functions are impacted, such as the Federal Student Aid Information Center, the credit unions may be able to help their members get answers to their questions. And that can be a great way of marketing to their members, saying, “We can help you, and yes, the federal
PLUS loan has ended. “We have products that can help you. And we can also answer your questions about student financial aid and student loans.”

[08:01] Vince Passione: Now Mark, just to clarify, is it a foregone conclusion that the Parent PLUS and Grad PLUS programs will be gone this year?

[08:08] Mark Kantrowitz: I think it’s highly likely. The budget blueprint that passed the House, that legislation involves cuts that exceed the amounts that have been circulated for budget reconciliation. So that basically assumes that everything that they’re planning to do in budget reconciliation, such as eliminating the PLUS plans, eliminating the student loan interest deduction. Eliminating the tax-free status of scholarships, the eliminating of the American
Opportunity Tax Credit, reducing student loan forgiveness, that’s all likely to come to pass.

[08:46] Vince Passione: Now the comeback is from the administration that we’re going to basically rely upon the states to deal with this, which sounds interesting. But the question is, can the states really manage this and should they manage it?

[09:01] Mark Kantrowitz: Well, the states lack the capacity to replace the federal student loan servicers. There are a few state servicers that have serviced federal student loans, but they don’t have the capacity. Now most likely, the federal student loan servicing will be shifted to another federal agency. There’s some questions about whether they have the legal authority to do this without an act of Congress. But the two most likely destinations for federal student loans are the US Treasury and the Small Business Administration. There’s also been some mention of the Commerce Department, but US Treasury has experience in dealing with debt. They would be the right choice. Small Business Administration and Commerce don’t have any relevant experience.

[09:52] Vince Passione: Interesting, Mark. So I was chatting with another colleague in the industry, and one of the comments was, “Do you think the government, the Treasury, is going to sell the $1.65 trillion book of federal loans?” Is there a private credit firm that would purchase these? Is there any sort of reality to that rumor that the government, the Treasury might just say, “You know what? Let’s just sell the book”?

[10:20] Mark Kantrowitz: Well, there certainly is interest among the Trump administration in privatizing the federal student loan programs, both the existing loan portfolio and new loans. But I don’t know of any of the lenders that participated in the FFEL, Federal Family Education Loan Program or Guaranteed Student Loan Program, who have any interest in bringing back FFEL, other than the small nonprofits. They just don’t have the appetite or frankly, the capacity to acquire $1.6 trillion in federal student loans. And even if they did have the interest, they just don’t have the capacity. The most that the FFELP lenders had managed in the past were a few hundred billion dollars, not even close to over a $1 trillion.

[11:17] Vince Passione: So Mark, if we look some of the stats that are out there today say that average borrower will graduate or average student will graduate in 2025 with about, call it, $38,000 to $40,000 of student loan debt. Now our business, LendKey, we probably have a little over 200 credit unions that are writing in-school loans, about 150 that are doing education refinance loans. And I’d say throughout the credit union industry, depending on how you count it, there’s probably a 1,000 credit unions that currently underwrite private student loans. And across all the balance sheets of all these credit unions, it’s probably $7 billion in total of outstanding private student loans.

[11:56] Vince Passione: So if we look at what’s happening, should they be prepared for the fact that their members are going to need more help? And they need to be prepared for the fact that it might be more help when they’re trying to fund their in-school education. It might be more help when they have to fund their graduate degrees. And it might be more help when they come out of school and potentially need to consolidate their loans, and the consideration is consolidating some of their federals with their privates. So what are your thoughts on is there going to be an increased demand for private student loans, which is roughly anywhere between $10 to $12 billion annually? And then should my credit union clients and prospects be thinking about increased demand from their membership?

[12:43] Mark Kantrowitz:  So if you look at the aggregate limits for undergraduate loans, we’d be going from $31,000 to $50,000. So there will likely be a decrease in demand for private loans from undergraduate borrowers given the increase in the loan limits for federal loans. Though there’s a lot of pent-up demand, so you may actually see borrowers who wouldn’t qualify for a private student loan, borrowing more from the federal loans.

[13:14] Mark Kantrowitz:  But if we look at the graduate loans and the parent loans, you’re getting rid of the PLUS loan, which has effectively no limit. And replacing it with an aggregate limit that is somewhat lower than the maximum amount that people typically borrowed from the federal student loan program, when you consider parent borrowing and graduate student borrowing. So we might see an increase in private borrowing by graduate students, and graduate students tend to be better credit quality than undergraduate students. So what you may see is a shifting in borrowing from undergraduate students to graduate students, and an improvement in the credit quality overall of the borrowers.

[14:01] Vince Passione: Yeah, it’s interesting. I was listening to the earnings call of Sallie Mae, and their CEO made a similar response to a question from the analyst, which was, “Look, not really sure the impact on the in-school undergraduate. But certainly, if these PLUS loans were to either be limited or removed, that’s probably the area where there’s more of an expansion opportunity for private borrowing.” So that makes a lot of sense. Mark, what about all those students that were applying for things like public student loan forgiveness? They haven’t made a payment, they thought they were going to be forgiven. Now suddenly, the Treasury is going to be responsible for potentially collecting on these. What happens to those borrowers? Do you think those borrowers, we’re going to get these emergency calls from people who need to consolidate their federal loans because they haven’t made a payment in or been making very minimal payments in the past, in some cases, eight up to 10 years?

[15:03] Mark Kantrowitz: So there’s two aspects that we need to look at. One is income-driven repayment plans, and then the second is qualifying employers. So let’s address the qualifying employers first. President Trump has issued an executive order that seeks to exclude employers who are involved in occupations that he disagrees with. So it’s an ideological test. So it’s presented as excluding illegal employment, but right now, none of the employment is actually illegal. But there will likely be litigation over that if he attempts to implement it. He’s going to attempt to implement it through regulations. But once again, there could be lawsuits under the Administrative Procedures Act that refers to it as arbitrary, capricious and vague, and an abuse of discretion. And I think very likely that those lawsuits would succeed.

[16:07] Vince Passione: You look at this data all the time. How large a population of borrowers are actually applying for all these various, like the SAVE program, the public service forgiveness? Can you give us a sense of the 44 million or so borrowers out there that have student loans, what’s the percent that are actually in these queues, either waiting or actually on these plans?

[16:34] Mark Kantrowitz: So eight million borrowers were in the SAVE repayment plan and they’ve been in an interest-free forbearance until the court case is resolved. So I expect that to continue until they’re able to switch into another income-driven repayment plan, so for that three-month. Total number of borrowers in any income-driven repayment plan is about 12 million borrowers, who are pursuing Public Service Loan Forgiveness, is around
one or two million. So it’s a significant percentage of borrowers, but it’s not an overwhelming percentage of borrowers.

[17:12] Margie Click: Hello, this is Margie Click, CEO and president of Agriculture Federal Credit Union. As a $360 million credit union, we’re always looking for ways to innovate and expand our financial solution offerings to attract new members. That’s why for nearly a decade, we have been partnering with LendKey to attract and acquire new credit union members.

[17:36] Vince Passione: So Mark, before we wrap up, any final words of advice for our listeners regarding the current and future state of the Department of Education and the impact on its members? We be covered a lot here, but private student loan, in-school graduate, what the impact is going to be on graduates? And what they should be thinking ahead about, as we think about this next fall enrollment period? And what’s going to happen to these graduate students as well?

[18:01] Mark Kantrowitz: So there is going to be a lot of chaos and confusion during the Trump administration, and it’s not just from the White House, it’s also from Congress. The cutting nearly half the staff at the US Department of Education, that may be just the first step, they may be cutting additional. That was using a very blunt instrument to terminate a lot of employees. They may now start looking at more fine-tune cuts in addition to that. For example, I’ve been hearing that they are considering replacing the Federal Student Aid Information Center, which is a call center that answers questions about the FAFSA and Federal Student Aid. That they may be replacing that with an AI- based system, because AI may be cheaper than paying real people.

[18:48] Mark Kantrowitz:  And the credit unions will be able to help their members get answers to questions. So if they call the Federal Student Aid Information Center and they don’t really get a good answer, the credit unions can help them get the answer that they need because they have expertise in this area. Whereas an AI-based model may not have that expertise, so I certainly think that the credit unions can do more in their customer service function, which they already excel at. They can expect to get more calls or maybe they can use that as marketing say, “Well, you want answers to your questions, we can help you get the answers you need.”

[19:26] Vince Passione: Now, Mark, what about for those credit unions that have been reluctant to step into this business? There’s lots of confusion still with credit unions that these are federal loans, they’re not private loans, they don’t perform well. What advice would you give them? We just talked about the fact that Grad PLUS and Parent PLUS, if it’s curtailed, these are individuals that typically, unlike the undergraduate program, these are individuals that are seeking advanced degrees. They typically graduate and they’ll become a doctor, a lawyer, or they might be a management consultant. So they’ve got high-earning potential, high-employment potential. What advice and counsel would you give them about stepping into this industry?

[20:11] Mark Kantrowitz: Right. So if you look at the White House budget, it has data on the default rates and the subsidy rates for the various federal student loan programs, including one table that breaks it down by the repayment plan. And you can see that the PLUS loans are actually among the most profitable to the federal government. It’s the student loans that aren’t profitable. And so it’s very hard to compete with a federal student loan that is low price to the borrower. But for the Grad PLUS and Parent PLUS loans, they have higher interest rates, higher fees, which means that private student loans are more competitive. And if those loans go away, you’re going to shift a lot of volume to the private lenders. And this is among the borrowers who are most profitable, least likely to default, and where you can see in advance that they’re going to be low risk. Someone who’s getting a PhD in computer science from MIT is extremely low risk. And it’s the lenders like credit unions that are best positioned to evaluate the credit quality of these borrowers. Not just based on their credit scores and their past repayment behavior, but also their future repayment behavior based on where they’re going to school and what degree they’re pursuing.

[21:33] Vince Passione: Mark

[21:34] Mark Kantrowitz: What?

[ 21:36] Vince Passione: No, please finish.

[21:39] Mark Kantrowitz: There the only real risk is will they actually graduate? [00:20:00] If they graduate, they repay the debt. Even the federal student loans, if you look at who defaults on their student loans, it is the borrowers who drop out of college, who are most likely to default. Among all undergraduate students, college dropouts are four times more likely to default. Among students in bachelor degree programs, it’s the college dropouts who are 95 times more likely to default. So if they get to the finish line, they repay their loans. It’s only if they don’t complete their degree. So we don’t really have a student loan problem, so much as a college completion problem.

[22:15] Vince Passione: Yeah. That’s been consistent since I started in this industry, probability to graduate and the impact it has on repayment, which makes a tremendous amount of sense. So a lot of change, short period of time, not a lot of transition time to get us there. So we’re all going to be prepared for this upcoming lending season, and try to help our credit unions and their members through it. Mark, thanks again for joining us today. And to our listeners, thank you for tuning into 22 Minutes in Lending. If you enjoyed this episode, be sure to subscribe, leave a review, and we’ll see
you back here at our next 22 Minutes in Lending. Mark, thanks so much for your time.

[22:51] Mark Kantrowitz: Thank you.

[22:52] Narrator: Thank you for listening to the 22 Minutes in Lending podcast. We hope you enjoyed today’s episode. You’ll find links to any resources mentioned in the show notes. If you’re enjoying our show, be sure to subscribe and leave us a five-star review.