What’s Stayed Safe – And What’s Uncertain – In College Student Aid
Urban Matters: Kim, it was April when we last talked about the state of college financial aid. It’s certainly been an eventful intervening six months. Let’s unpack what’s gone down.
First, there’s the US Department of Education. President Trump came back to office determined to close it. It includes the Office of Federal Student Aid, which oversees trillions of dollars in student grants and loans. So, should we be worried about the future of college funding?
Kim Nauer: It’s ironic that President Trump continues to talk about closing the Department of Education, given that it has aggressively enforced the administration’s agenda to end “diversity, equity and inclusion” in all aspects of education, from monitoring kindergarten wall art to ending minority admissions programs in college.
Nearly half the agency’s 4,100 staffers were laid off soon after Trump took office. The administration then took aim at another fifth of the workforce this past week, during the government shutdown, reportedly laying off 466 staffers in charge of special education and civil rights enforcement, leaving $60 billion in K-12 special education funding in communities with no federal oversight.
Nevertheless, Federal Student Aid’s politically popular programs seem to be faring better. The Free Application for Federal Student Aid, better known as the FAFSA, actually opened early this year with ample tech staff and customer support. Student loans and grants are being disbursed to colleges. Loan servicers are continuing to collect payments and work with borrowers.
UM: So, the Federal Student Aid system is safe for now?
Nauer: Who knows? President Trump initially considered handing over Federal Student Aid’s $1.67 trillion student loan portfolio to the Small Business Administration when announcing plans to close the Education Department. But this idea was dismissed by Congress, which noted that only the Treasury Department would be capable of managing something so massive. This may be particularly true now. TransUnion, the credit reporting agency, reported that one-in-five borrowers was “seriously delinquent” coming off a five-year Covid-related payment pause that ended in May.
The latest wrinkle: as Politico reported earlier this month, staff in the Education Department and Treasury are exploring the idea of selling some student loan debt to private buyers. But would anyone want to buy? The government can garnish wages and withhold Social Security checks from delinquent borrowers; banks cannot. Maybe more importantly, students signed loan contracts under the government’s more lenient payment terms. Advocates for borrowers promise that private lenders would be held accountable for those terms.
UM: There’s also the One Big Beautiful Bill Act, the 10-year tax-and-spend law enacted in July. It includes deep, multi-year cuts in social and educational programs. What does that mean for college students?
Nauer: The new law, dubbed OB3 by many in Washington, is a bit of a mixed bag. There was a collective sigh of relief when Congress agreed to preserve the popular Pell Grant program for low-income students with $10.5 billion over the next 10 years. The law also created a new “Workforce Pell” program, slated to go into effect next July. The hope is that students will be able to use Pell for short-term programs that will lead to high-quality jobs more quickly than a traditional degree program.
UM: That sounds good. So, what do we need to be worried about?
Nauer: Take a guess: Student loans again. Looking for cost savings, Republicans dived into Federal Student Aid’s various offerings. While undergraduate student loans were left unchanged, OB3 rewrote the rules for grad students, parents, and also for students hoping to take advantage of income-driven repayment relief.
The resulting changes could have a particularly profound impact on professionals, like doctors and lawyers, who routinely take out large loans in the hopes of a lucrative career. Under Grad PLUS, they could borrow the full cost of attendance for their program. The new rules, effective in July, will cap government-backed loans at $50,000 annually with a lifetime cap of $200,000. A typical doctor pays this amount – and often much more – for tuition alone. Students would have to go onto the private market to pay living expenses and other costs. Other types of grad student loans will be capped at $20,500 annually with a $100,000 lifetime cap.
While experts generally applaud efforts to avert excessive college debt, the new “Grad Direct” program could push many professionals into the more expensive private student loan market — if they decide to pursue a professional degree at all. The American Medical Association president calls it a “big-time punch in the face.”
UM: How about parents? Can they still take out loans to help their kids pay for college?
Nauer: Yes, but a lot less than in the past. Previously, parents have been able to borrow up to the full cost of attendance to help their students pay for school. This adds up when private colleges are advertising costs of $80,000+ per year.
Students in the Class of 2026, beginning to submit their college applications now, cannot rely on such large loans. Parents may now take out a maximum of $20,000 per year with a total cap of $65,000 for each child. Thankfully, only four percent of undergraduate students rely on such Parent PLUS loans. But among that group, about one-third may need to take out private loans to get through school.
UM: What about students with existing loans? What’s happening to them? And can future students expect help with their loans if needed?
Nauer: This group is facing the most chaos, particularly if they need income-driven loan repayment terms or are hoping for public service loan forgiveness.
President Trump – in his first term and now – ordered the Education Department to roadblock these programs to the greatest extent possible. (President Biden, on the other hand, used the Covid emergency to green-light an unprecedented amount of loan forgiveness and ordered his administration to create new pathways for income-driven repayment relief.)
In OB3, Congress gamely tried to pare down and rationalize options for students seeking income-driven repayment, introducing the new Repayment Assistance Plan, or RAP. Education Department staffers are working on the regs right now. But the rub is that there is a rats’ nest of different programs, all with different terms depending on when you took out (or consolidated) your loans. Former students often need legal help to figure out what’s advantageous. Prospective borrowers should look into such programs, but not count on them.
UM: OK, given all that, what are you telling college counselors and families this fall?
Nauer: I am going to go out on a limb and say I think the Education Department and Federal Student Aid are here to stay. Consider what we just talked about. What other agency would be capable of – or interested in doing – this work? We certainly need the staff at Federal Student Aid to keep our student loan system viable and safe.
To families, I say: Keep costs front and center in your college hunt. Look for grants and scholarships. Consider loans, but keep them to a minimum. You will be avoiding stress. And you will be able to blissfully ignore the politics of higher education funding now and into the future.
Kim Nauer is a project director at the Center for New York City Affairs at The New School and founder of the website Understandingfafsa.org. In addition to her work on financial aid, she has authored major reports on chronic student absenteeism, college preparation, and other subjects related to New York City public schools.
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