The Trump administration has reportedly updated its plans for the Department of Education’s Office of Federal Student Aid, signaling a potential shift that could profoundly alter how the federal government manages the nation’s higher education financing.
FSA currently oversees more than $120 billion in student grants and loans annually. The Department of Education is already offloading the oversight of some of its core responsibilities to the Treasury Department through an interagency agreement. However, recent reports from The Washington Sun indicate that the Trump administration is now looking to turn the Education Department’s largest office into a stand-alone agency by Oct. 1, 2027.
The department quickly disputed the Sun’s report, dismissing it as "fake news." Despite the administration’s pushback, the swift and sharp outcry from Democratic lawmakers and college-access advocacy groups highlights ongoing, deep-seated concerns over the administration’s student loan policies and whether federal agencies possess the operational stability to carry out such sweeping structural overhauls.
This reported shift comes at a turbulent time, as FSA is already implementing a sweeping overhaul to federal student loan policy. More than a year ago, Education Secretary Linda McMahon fired more than 320 FSA employees, amounting to about 25 percent of the office’s total staff. That massive reduction in workforce has left remaining personnel stretched thin as they navigate complex systemic changes.
Regardless of whether FSA ultimately becomes an independent agency, transitions permanently into the Treasury Department, or remains under a modified framework, higher education experts warn that the transition could spell major disruption for thousands of institutions and tens of millions of students if not handled with extreme care.
According to the Sun, which reported that it confirmed the latest plan through internal documents and three anonymous sources, the new transition would be led by Richard Lucas, the office’s chief operating officer, alongside the White House’s Office of Management and Budget. The Sun reported that Lucas informed FSA staff about the plan in late September but declined to take questions from employees who were left seeking clarity about their professional futures.
The Education Department’s current interagency agreement with the Treasury outlined a three-phase transition. The first phase—putting the Treasury in charge of collecting on defaulted student loans—is already underway. However, neither department has provided extensive details regarding stages two and three, which involve handing off nondefaulted loans and subsequently providing operational support for the Free Application for Federal Student Aid, commonly known as FAFSA, along with other critical functions. As part of this ongoing transition, FSA staff have already been forced to change offices and are now working directly out of the Treasury Department building.
Ellen Keast, an Education Department spokesperson, declined to comment on what specifically about the Sun’s reporting was incorrect. Instead, she pointed directly to the existing interagency agreement, asserting that "the Trump Administration is returning to the states and breaking up the federal education bureaucracy."
The Office of Management and Budget also characterized 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, who previously worked inside FSA, noted that the reported plans appear to align closely with the third phase of the existing Treasury agreement. Storey suggested that rather than becoming a completely independent entity, FSA might serve as an independent bureau or subdivision that coordinates closely with both the Education Department and the Treasury. However, the Sun maintained that FSA would be established as an independent agency rather than a bureau. Under federal law, Congress would have to sign off on making FSA fully independent of the Education Department.
A source familiar with the status of FSA, who spoke on the condition of anonymity, expressed skepticism that there is any substantive plan currently in motion to make FSA entirely independent, even as a Treasury bureau. The source pointed out 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 leadership roles if the entire office was actively 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 the implementation of their existing agreement.
Even so, critics warned that making FSA independent could cause significant disruptions extending far beyond Pell Grants and student loans. FSA also holds the vital responsibility of overseeing colleges and universities to ensure they are fully complying with their legal obligations under federal law.
"When did creating an entirely new federal agency to do the exact same work that’s already being done equate to efficiency?" asked Sen. Patty Murray, a Washington State Democrat and vice chair of the Appropriations Committee, in a strongly worded news release. "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, described FSA as an already "scandal-plagued student loan arm" and condemned the latest announcement as a pointless distraction from the widespread financial harm borrowers are currently facing.
This is not the first time government officials have floated the concept of turning FSA into a stand-alone agency. During Donald Trump’s first term in office, then-Education Secretary Betsy DeVos openly advocated for Congress to take student loan management off her agency’s list of responsibilities. DeVos pitched the idea that loans should be handed off to a stand-alone government corporation run 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, The Heritage Foundation’s Project 2025, a comprehensive set of policy recommendations drafted for the second Trump administration, suggested that the executive branch work proactively with Congress to spin off FSA and its student loan obligations to a new government corporation equipped with professional governance and management structures.
However, current federal law explicitly requires the Education Department to manage all student aid authorized by Title IV of the Higher Education Act of 1965.
Education Secretary McMahon, who has repeatedly vowed to shut down her own agency, has acknowledged publicly that only an act of Congress possesses the legal authority to dissolve the department. Still, the administration has moved forward with a dozen interagency agreements aimed at outsourcing certain programs and responsibilities. McMahon has described these agreements as a "proof of concept" to demonstrate to Congress how federal education programs could continue to function without the existence of her department.
If the Education Department ultimately moves forward with spinning FSA off into its own independent agency, the source familiar with FSA noted they would not necessarily oppose the concept in principle, but emphasized that it would require immense time and resources to execute successfully.
"It might be a good idea in theory," the source said. "But building it from scratch just seems like a lot of effort."
Storey from NASFAA emphasized that regardless of whether the Education Department ultimately keeps FSA as an internal office, converts it into a Treasury bureau, or separates it into a fully independent agency, her core concerns remain focused on stability and continuity for students and families.
"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," she said. "That simply cannot be done in the proposed timeline."
