The Trump administration has reportedly updated its long-term strategic plans for the Department of Education’s Office of Federal Student Aid, fueling intense debate among lawmakers, higher education advocates, and institutional leaders over the future administration of billions of dollars in federal assistance.
Federal Student Aid, commonly known as FSA, oversees more than $120 billion in annual student grants and loans, acting as the financial backbone for millions of students pursuing higher education across the United States. While the Department of Education has already begun offloading the oversight of certain administrative responsibilities to the Treasury Department through interagency agreements, new reports indicate that the administration is looking to go even further. According to a recent report by The Washington Sun, which cited internal documents and anonymous sources, the administration is now exploring a plan to turn the Education Department’s largest office into a completely stand-alone federal agency by October 1, 2027.
The Department of Education has strongly disputed the report, publicly dismissing it as "fake news." However, the swift and sharp outcry from Democratic lawmakers and college-access advocacy groups highlights ongoing, deep-seated anxieties regarding the administration’s broader student loan policies and its capacity to execute such massive structural transformations without triggering systemic chaos.
The reported shift comes at a turbulent time for the agency, as FSA is already in the midst of implementing a sweeping overhaul to federal student loan policies. More than a year ago, Education Secretary Linda McMahon moved aggressively to downsize the office, firing more than 320 FSA employees, which amounted to approximately 25 percent of the office’s total workforce. Higher education experts warn that whether FSA eventually becomes an independent agency, is absorbed further into the Treasury, or undergoes another structural relocation, the transition poses severe risks of disruption for thousands of higher education institutions and tens of millions of students if it is not handled with extreme care and deliberation.
According to The Washington Sun, the latest plan for FSA would be spearheaded by Richard Lucas, the office’s chief operating officer, working in tandem with the White House’s Office of Management and Budget. Sources indicated that Lucas informed FSA staff about the prospective plan during a late-September meeting, though he reportedly declined to field questions from anxious employees.
This development intersects directly with the Education Department’s current interagency agreement with the Treasury Department, a partnership outlined in three distinct phases. The first phase—which puts the Treasury Department in charge of collecting on defaulted student loans—is already actively underway. However, neither department has provided extensive public detail regarding the operational milestones of stages two and three, which involve handing off nondefaulted loans and subsequently providing operational support for the Free Application for Federal Student Aid, or FAFSA, along with other critical functions. As part of this ongoing transition, FSA staff have already been displaced from their traditional offices and are now operating out of Treasury Department facilities.
Ellen Keast, an Education Department spokesperson, declined to comment on the specific inaccuracies alleged in The Washington Sun‘s reporting. Instead, she pointed directly to the existing interagency agreement to reinforce the administration’s broader philosophical goals. She asserted that the Trump administration is actively returning power to the states and systematically breaking up what she characterized as the federal education bureaucracy.
Similarly, representatives from the Office of Management and Budget dismissed the reporting as inaccurate, while the Treasury Department did not respond to requests for comment from journalists.
Melanie Storey, president of the National Association of Student Financial Aid Administrators and a former FSA official herself, noted that the reported plans appear to align closely with the third phase of the Treasury agreement. From her perspective, the proposal could mean that rather than effectively functioning as an internal office of the Treasury, FSA would serve as an independent bureau or subdivision that maintains coordination with both the Education Department and the Treasury. However, she pointed out that creating a truly independent agency, as opposed to a bureau, would require formal legislative action and congressional sign-off, as current law explicitly mandates that the Education Department manage all student aid authorized under Title IV of the Higher Education Act of 1965.
A separate source familiar with the internal status of FSA, who spoke on the condition of anonymity, expressed skepticism that a substantive plan exists to make FSA entirely independent, even as a Treasury bureau. The source highlighted that FSA’s chief financial officer, Rhonda Shaffer, was recently named the new head of Treasury Partnership just weeks prior, arguing that it would defy logic to shuffle top personnel into integration roles if the office were simultaneously being prepared to spin off into its own standalone agency. In this source’s view, the rumors may simply reflect pressure from the Office of Management and Budget designed to force the Education Department and the Treasury to accelerate the implementation of their existing interagency agreements.
Regardless of the administrative mechanics, critics warned that spinning off FSA could cause profound disruptions extending far beyond the administration of Pell Grants and federal student loans. FSA also bears the critical responsibility of monitoring colleges and universities to ensure they remain fully compliant with their obligations under federal law.
Lawmakers quickly mobilized against the reported plan. Sen. Patty Murray, a Democrat from Washington State and vice chair of the Appropriations Committee, released a scathing statement condemning the proposal. She questioned the logic of creating an entirely new federal agency to perform the exact same work already being executed, arguing that such moves do not equate to true administrative efficiency. Murray emphasized that tens of millions of Americans depend on the government to function reliably, noting that the administration’s prior cuts to nearly half of FSA’s staff have already strained the system. She warned that intentional structural shake-ups threaten to introduce genuine financial chaos into the lives of everyday citizens.
Advocacy groups and labor unions, including Protect Borrowers and the American Federation of Teachers, similarly denounced the reported plans. They characterized FSA as a historically troubled arm of the government and criticized the announcement as a pointless distraction from the widespread financial harm borrowers are already experiencing under current policies.
The concept of spinning FSA out of the Department of Education is not entirely novel. During the first term of the Trump administration, then-Education Secretary Betsy DeVos openly advocated for Congress to relieve her department of student loan management responsibilities. DeVos repeatedly pitched the idea that federal loans should be transferred to a stand-alone government corporation governed by a professional, expert, and apolitical board of governors. In speeches at annual training conferences, DeVos argued that Congress never designed the Department of Education to operate as a bank, nor did it intend for the education secretary to serve as the nation’s primary lender, despite the structural expectations embedded in federal policy.
The Heritage Foundation’s Project 2025, which served as a comprehensive set of policy blueprints for the second Trump administration, similarly recommended that the executive branch collaborate with Congress to extract FSA and its massive loan obligations from the Department of Education, placing them under a new corporate governance structure.
Education Secretary Linda McMahon has previously vowed to shut down her own agency entirely, though she has consistently acknowledged that only an act of Congress possesses the legal authority to dismantle the department. In the absence of direct legislative dissolution, the administration has pursued a strategy utilizing a dozen interagency agreements to outsource core federal programs. McMahon has framed these agreements as a vital "proof of concept" intended to demonstrate to lawmakers how federal education programs could theoretically endure even if the Department of Education were eliminated.
Even among those somewhat sympathetic to the concept, the practical hurdles remain daunting. The source familiar with FSA noted that while spinning the office off into an independent entity might make sense conceptually under a different set of circumstances, the immense expenditure of time and resources required to build such an infrastructure from scratch makes the endeavor extraordinarily difficult.
Storey emphasized that whether the administration ultimately chooses to retain FSA within a diminished Education Department, integrate it permanently as a Treasury bureau, or carve it out into an independent agency, the primary concerns of financial aid professionals remain centered on stability. She stressed that any reform, restructuring, or relocation of FSA’s core operational functions must be executed with extreme care and deliberate planning to minimize service disruptions for students and their families—a standard that she and other experts fear cannot realistically be met under the administration’s proposed timeline.
