The Trump administration is reportedly considering a fundamental restructuring of the Department of Education’s largest and most consequential wing, the Office of Federal Student Aid (FSA). According to internal documents and accounts from sources familiar with the matter, the administration is exploring a plan to transition the office into a standalone, independent agency by October 1, 2027.
The Office of Federal Student Aid is a massive operation within the federal government, responsible for overseeing more than $120 billion in student grants and loans annually. Its reach extends to tens of millions of borrowers and thousands of higher education institutions across the country. Any shift in its governance or institutional home carries profound implications for the stability of the American higher education system and the financial lives of students.
The report, first published by The Washington Sun on Thursday, suggests that the administration’s ambitions for the office have expanded beyond current efforts to outsource its functions. While the Department of Education (ED) has already begun offloading several of its core responsibilities to the Department of the Treasury through a series of interagency agreements, the creation of a fully independent agency would represent a much more radical departure from the current federal education framework.
The Department of Education has moved quickly to dismiss the report, with spokespeople labeling the claims "fake news." However, the report has already sparked a swift and sharp outcry from Democratic lawmakers, college-access advocacy groups, and labor unions. These critics argue that such a move would be the culmination of a broader effort to dismantle the federal education bureaucracy, potentially at the expense of students and borrowers who rely on the office for financial stability.
A Rapidly Shifting Landscape for Student Aid
The reported plan comes at a time of significant upheaval within the FSA. The office is currently in the midst of implementing a sweeping overhaul of federal student loan policy, a task made more difficult by a shrinking workforce. More than a year ago, Education Secretary Linda McMahon oversaw the layoff of more than 320 FSA employees, representing approximately 25 percent of the office’s total staff.
The administration has defended these cuts as part of a broader mission to reduce the size of the federal government and return power to the states. However, experts in student aid policy warn that the combination of staff reductions and institutional restructuring could lead to a catastrophic breakdown in service. Whether the FSA remains within the Department of Education, moves to the Treasury, or becomes a standalone entity, the transition is fraught with risk for the more than 40 million Americans with federal student debt.
According to the reports, the latest plan for the FSA’s independence is being spearheaded by Richard Lucas, the office’s chief operating officer, in coordination with the White House’s Office of Management and Budget (OMB). Lucas reportedly informed FSA staff of the potential transition in late September but declined to take questions or provide specific details regarding the logistics of the move.
The proposed timeline—targeting a completion date in the fall of 2027—suggests a sense of urgency within the administration to finalize the restructuring before the end of the current presidential term.
The Role of Interagency Agreements
The move toward independence appears to be an escalation of the administration’s existing strategy of using interagency agreements (IAAs) to bypass traditional departmental structures. The Department of Education’s current agreement with the Treasury Department outlines a three-phase transition of student aid responsibilities.
The first phase, which involves putting the Treasury Department in charge of collecting on defaulted student loans, is already underway. This move was framed as an efficiency measure, utilizing the Treasury’s existing infrastructure for debt collection. However, the subsequent phases remain shrouded in ambiguity.
Phase two involves the transfer of oversight for non-defaulted loans, a significantly larger and more complex portfolio. Phase three is intended to provide operational support for the Free Application for Federal Student Aid (FAFSA) and other critical functions that are currently managed by the Department of Education. As part of this ongoing transition, some FSA staff members have already been relocated and are now operating out of the Treasury Department’s offices.
Ellen Keast, a spokesperson for the Education Department, declined to address the specific details of the Washington Sun report but reiterated the administration’s broader philosophy. She noted that the administration is focused on "breaking up the federal education bureaucracy" and returning authority to the states.
The OMB also weighed in, calling the reporting "inaccurate," while the Treasury Department did not respond to requests for comment. Despite these denials, the alignment between the reported plan and the administration’s stated goals has kept the education community on high alert.
Bureaucratic Reform or "Intentional Sabotage"?
The prospect of an independent FSA has divided experts and observers. Melanie Storey, president of the National Association of Student Financial Aid Administrators (NASFAA) and a former FSA official, noted that the reported plans seem to mirror the third phase of the existing Treasury agreement. The key distinction, she explained, is whether the office becomes a bureau within the Treasury or a fully independent agency.
If the FSA were to become an independent agency, it would function as a standalone bureau or subdivision, coordinating with both the Department of Education and the Treasury. However, such a change would likely require the approval of Congress. Under current law, specifically the Higher Education Act of 1965, the Department of Education is legally mandated to manage all student aid authorized under Title IV.
A source familiar with the current status of the FSA expressed skepticism regarding the feasibility of the independence plan. Speaking on the condition of anonymity, the source suggested that there is no substantive, detailed plan to make the FSA independent, even as a bureau of the Treasury. They pointed to the recent appointment of Rhonda Shaffer, the FSA’s chief financial officer, as the new head of the Treasury Partnership. The source argued that such a leadership change would be illogical if the office were truly destined to become its own separate agency.
In this view, the rumors of an independent agency may be a tactical move by the OMB to pressure the Education and Treasury Departments to accelerate their existing agreements.
However, critics see something more afoot. Senator Patty Murray, a Democrat from Washington and vice chair of the Appropriations Committee, released a scathing statement following the reports. She questioned the logic of creating an entirely new federal agency to perform work that is already being done, labeling the move "intentional sabotage."
"Tens of millions of Americans are depending on government to actually work here," Murray said. "Trump has already pushed out nearly half of the FSA’s staff—this threats to create true financial chaos in people’s lives."
A Long-Standing Conservative Vision
The idea of separating the student loan portfolio from the Department of Education is not a new concept. During the first Trump administration, then-Education Secretary Betsy DeVos frequently advocated for Congress to relieve her department of its banking duties. DeVos argued that the Department of Education was never intended to be a bank and pitched the idea of a standalone government corporation.
In 2019, DeVos told attendees at an FSA training conference that the student loan office should be run by a "professional, expert, and apolitical board of governors." She argued that the current structure placed an undue burden on the Secretary of Education, who was effectively forced to act as the nation’s "top banker."
This vision is also reflected in the Heritage Foundation’s Project 2025, a comprehensive set of policy recommendations designed for a second Trump term. The document suggests that the executive branch should work with Congress to "spin off FSA and its student loan obligations to a new government corporation with professional governance and management."
For the current Secretary of Education, Linda McMahon, the restructuring of the FSA appears to be part of a larger "proof of concept." McMahon has been open about her desire to dismantle the Department of Education entirely, though she has acknowledged that only Congress has the legal authority to do so. By outsourcing programs and responsibilities to other agencies through interagency agreements, McMahon is attempting to demonstrate that education programs can continue to function without a centralized department.
Concerns Over Service and Oversight
Beyond the political and legal hurdles, there are significant practical concerns regarding the impact on students and colleges. The FSA does more than just distribute money; it serves as a regulatory body, ensuring that colleges and universities comply with federal laws and financial standards.
Advocacy groups like Protect Borrowers and the American Federation of Teachers (AFT) have been vocal in their opposition to the plan. They described the FSA as an office already struggling with various challenges and condemned the proposed restructuring as a "pointless distraction" from the financial hardships facing borrowers.
Melanie Storey of NASFAA emphasized that any reform of this magnitude requires careful planning and a realistic timeline—something she believes is currently lacking.
"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."
As the October 2027 deadline approaches, the future of the Office of Federal Student Aid remains a central flashpoint in the administration’s broader effort to reshape the federal government. While the administration maintains that these changes are necessary for efficiency and reform, the potential for disruption in the nation’s student aid system continues to loom over millions of American families.
