The Trump administration has reportedly updated its plans for the Department of Education’s Office of Federal Student Aid, exploring a path to turn the division into a completely independent agency by October 1, 2027.
The Office of Federal Student Aid, commonly known as FSA, oversees more than $120 billion in federal student grants and loans annually. While the Department of Education is already offloading some oversight responsibilities to the Treasury Department through interagency agreements, new reports indicate that the administration’s ambitions for the office go even further. According to a recent report by The Washington Sun, which cited internal documents and three anonymous sources, the administration is now looking to separate the ED’s largest office entirely from the department and establish it as a stand-alone entity.
The Education Department has strongly disputed the report, dismissing it as "fake news." However, the swift and sharp outcry from Democratic lawmakers and college-access advocacy groups highlights deep-seated, ongoing concerns regarding the administration’s broader student loan policies and its capacity to execute such massive structural changes smoothly.
This reported shift comes at a turbulent time for the agency, as FSA is already in the middle of implementing a sweeping overhaul of federal student loan policy. More than a year ago, Education Secretary Linda McMahon fired more than 320 FSA employees, cutting roughly 25 percent of the office’s total staff. Higher education experts warn that whether FSA eventually becomes an independent agency or is permanently absorbed into the Treasury Department, any transition handled without extreme care could trigger catastrophic disruptions for thousands of higher education institutions and tens of millions of student borrowers nationwide.
According to The Washington Sun, the administration’s latest plan for FSA would be led by Richard Lucas, the office’s chief operating officer, working in tandem with the White House’s Office of Management and Budget. The report noted that Lucas informed FSA staff about the plan during a late-September meeting but declined to take questions from employees.
The developments align closely with the department’s existing interagency agreement with the Treasury Department, which outlined a three-phase transition. The first phase—putting the Treasury in charge of collecting on defaulted student loans—is already underway, and FSA staff have physically changed offices to work out of the Treasury Department. However, neither department has provided substantial public detail regarding the second and third phases, which are supposed to involve handing off nondefaulted loans and eventually providing operational support for the Free Application for Federal Student Aid, or FAFSA, and other critical functions.
When contacted for comment, Ellen Keast, an Education Department spokesperson, declined to specify what aspects of The Washington Sun’s reporting were incorrect. Instead, she pointed directly to the existing interagency agreement, stating that "the Trump Administration is returning to the states and breaking up the federal education bureaucracy." The Office of Management and Budget similarly characterized the reporting as "inaccurate," while the Treasury Department did not respond to requests for comment.
Melanie Storey, president of the National Association of Student Financial Aid Administrators and a former FSA employee, noted that the reported plans appear to align closely with the third phase of the Treasury agreement. She suggested that rather than becoming an entirely new independent agency, FSA might instead serve as an independent bureau or subdivision that coordinates between both the Department of Education and the Treasury. However, she pointed out that making FSA fully independent of the Education Department would ultimately require formal approval from Congress, as current law mandates that the department manage all student aid authorized under Title IV of the Higher Education Act of 1965.
A separate source familiar with the current status of FSA, who spoke on the condition of anonymity, expressed skepticism that a substantive plan currently exists to make FSA completely independent, even as a Treasury bureau. The source noted that FSA’s chief financial officer, Rhonda Shaffer, had been named the new head of Treasury Partnership just weeks prior, arguing that it would make little sense to shuffle top leadership if the office was simultaneously being spun off into its own standalone agency. In this source’s view, the leaked plans may simply be a tactic by the Office of Management and Budget to pressure the Education Department and the Treasury to accelerate their existing partnership agreement.
Regardless of the administrative mechanics, critics warned that spinning off FSA could cause profound operational disruptions extending far beyond Pell Grants and student loans. FSA also carries the vital responsibility of overseeing colleges and universities to ensure they remain compliant with their obligations under federal law.
Lawmakers were quick to condemn the reported maneuver. In a sharply worded news release, Senator Patty Murray, a Washington State Democrat and vice chair of the Appropriations Committee, questioned the logic of the administration’s approach. "When did creating an entirely new federal agency to do the exact same work that’s already being done equate to efficiency?" Murray asked. "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."
Advocacy groups and labor unions, including Protect Borrowers and the American Federation of Teachers, similarly denounced the announcement. They characterized FSA as an already scandal-plagued student loan arm and criticized the reported restructuring as a pointless distraction from the widespread financial harm borrowers are currently facing.
The idea of separating student loan management from the Department of Education is not entirely new. During the first Trump administration, then-Education Secretary Betsy DeVos openly advocated for Congress to strip student loan management from her portfolio. DeVos repeatedly pitched the idea of handing the loan portfolio off to a stand-alone government corporation managed 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. "But that’s effectively what Congress expects based on its policies."
Similarly, Project 2025—the Heritage Foundation’s comprehensive set of policy recommendations for a second Trump administration—suggested that the executive branch work alongside Congress to spin off FSA and its extensive student loan obligations into a new government corporation with independent professional governance.
Education Secretary Linda McMahon has repeatedly vowed to shut down her own agency entirely, though she has consistently acknowledged that federal law dictates that only Congress possesses the authority to dissolve the department. In the absence of congressional action, the administration has moved forward with roughly a dozen interagency agreements to outsource various federal education programs and responsibilities. McMahon has publicly described these agreements as a "proof of concept" designed to demonstrate to lawmakers how federal education programs could potentially continue to function even without the Department of Education.
While some insiders believe that decoupling the student loan portfolio from the traditional education bureaucracy could be beneficial in theory, they caution that the practical hurdles are immense. A source familiar with FSA operations noted that while the idea might have merit, building such a complex administrative apparatus completely from scratch would require staggering amounts of time and resources.
For higher education administrators and student advocates, the immediate concern remains operational stability. Storey emphasized that whether the administration ultimately decides to keep FSA within the Department of Education, integrate it as a Treasury bureau, or carve it out into a fully independent agency, the core imperative must be protecting students and families from administrative failure.
"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," Storey said. "That simply cannot be done in the proposed timeline."
