SBA Jam
It's on fire, that's for sure.
Did you hear?? Student loans are moving to the Small Business Administration!
Tens of thousands of loans. Pretty complicated deal.
Wait. What? Southern New Hampshire University originated 114,501 loans? By themselves?? IN ONE QUARTER?????
The really cool thing about the internet is that there are just gobs of data out there if you’re willing to do a couple beep boop bops with your keyboard. All I had to do is go to the FSA Data Center and look up the most recent Direct Loan Program Volume Report. It’s from the first quarter of the 2024-25 year, which started July 1, 2024. Turns out, the Department has already originated more than 6.5 million loans this academic year. That number will probably reach somewhere between 12 and 13 million once this award year ends on June 30. Given that there are about 43 million borrowers with federal student loans, if we apply the oft-used back of the napkin average of 5.5 loans per borrower, it means that there are over 200 million outstanding loans in FSA’s portfolio.
Trump missed the mark by a few zeros. And while we all can all get a good giggle in whenever Mr. Concepts of a Plan is extremely wrong, it should also cause a good bit of concern among those of us who worry about the stability of our student aid system. Borrowers have been through enough, and all of the speculation about if loans are moving and when isn’t really helpful, mostly because this is just not a serious proposal.
Student loans are one of the largest categories of consumer debt in the US, roughly even with auto loans (but trailing mortgage loans by orders of magnitude).
It can be difficult to fathom the sheer size of the federal student loan portfolio, even for those of us who have been in this field for a hot minute. And while there are lots of criticisms to be levied at ED and FSA for the management of the student loan program, it’s pretty remarkable that FSA has managed to keep this ship afloat given staffing numbers have consistently hovered around 1,400 for the entire sub-agency, which also manages the FAFSA (with roughly 18 million applicants a year), school participation and oversight (for about 5,500 schools participating in student aid programs) and a tangled web of at least 100 contracts and IT systems.
There are certainly other federal agencies that provide programs and benefits at a massive scale; IRS processes over 166 million tax forms every year, 73 million people receive Social Security benefits, and about 68 million people are on Medicare. SBA just isn’t one of them. Their outstanding debt portfolio totals a little under $500 billion, about a third of the size of the federal student loan portfolio.
On top of that, they’re just… totally different programs. A loan is a loan insofar as you borrow money and pay it back, in this case to the government. But the terms really make the loan, and loans can be really straightforward, like most mortgages, or really, absurdly, confoundingly complicated, like federal student loans. Because you don’t just borrow a federal student loan and pay it. You get subsidies based on how much financial need you had when you enrolled, have different interest rates on different loans, can choose from at least 6 (and oftentimes more) repayment plans (some of which you need to reapply for annually), have over a dozen ways of pausing your payments (with or without interest accruing, depending on the loan your borrowed), and can get your loan discharged through a smorgasbord of programs (each with its own special requirements). I don’t know a ton about SBA’s loans, and I’m sure they’re complicated too (because government (read: Congress) is really really bad at simple), but saying SBA will just “take the loans” really gives “fold in the cheese” vibes.
There are also lots and lots of problems that come with doing something that really doesn’t happen in government, which is moving shit around. Can you reassign the $15 billion worth of contracts that FSA signed with loan servicers over to SBA? Are borrowers’ promissory notes, which state that you are signing this agreement with the Department of Education, still valid if the Department is vaporized? How does this interact with the laws that established the Department of Education, FSA, or SBA? What about the laws that set up the Direct Loan Program, or that protect borrower data privacy? Would the House and Senate Committees on Small Business now oversee the federal student loan portfolio? On and on the questions go, and I have a sneaking suspicion that once it becomes clear how complicated all of this is, how much of a mess it will be for borrowers, how much the White House will need Congress to do, and how long it will take to make this happen, we’ll see the White House walk this one back.
There’s also the thorny problem of the technology that sits behind the scenes, keeping the student aid system humming along. I wish I could say that these systems are hyper-efficient, agile, and adaptable but um. They’re not. By a long shot. Through the herculean efforts of some committed civil servants, FSA has done a tremendous job of rebuilding outdated systems, updating the code from COBOL, platforming them on the cloud, reinforcing the cybersecurity infrastructure, and making them better at exchanging information. But these systems are still massive and cumbersome, with hundreds of thousands of requirements dictating how to award and process aid. That’s saying nothing about the fact that FSA doesn’t own some of these systems and barely had the staff to manage them before staffing levels were slashed in half.
It would also be one thing if once a borrower left school they went off into the sunset, left to be managed by their loan servicer. This would create a nice little cleave in the system where you could potentially logically separate aid application and disbursement from servicing and collections. But that isn’t how this all works.
Loans get assigned to servicers when the loan is originated in a system called Common Origination and Disbursement (COD), which then creates a record associated with the borrower and their loan balance in the National Student Loan Data System (NSLDS). But COD isn’t just for origination and disbursement and NSLDS isn’t just for loans. These systems have morphed over time to perform functions that are woven throughout the student aid lifecycle (and beyond). For example, until a couple of years ago, COD hosted the PSLF Employer Database, which houses a list of employers that meet the terms of a qualifying employer under the Public Service Loan Forgiveness program. While my team shifted that database over to another system (called EDMAPS) when we revamped the way PSLF was processed, that’s just one of dozens of examples of functionality that just ended up in some system for some reason, likely based on some combination of cost, coding ease, and bandwidth.
And let’s not forget that borrowers don’t just go into repayment and stay there. Students drop out, re-enroll, graduate, and go back to school over and over again, often going into a deferment when they’re back in school. This all happens automatically, which makes things easier for borrowers but requires interconnectivity between the aid application and repayment systems - connectivity that becomes exceptionally complicated once the functions are split between agencies. The most likely outcome is losing the connectivity, when means more work for borrowers to pause their payments when they re-enroll. Oh, there’s also those pesky loan eligibility terms, which dictate how much you can borrow based on your undergraduate grade level and even if you can borrow at all (which you can’t if you’re in default on your federal student loans). Here again do we run into an issue where we need connectivity between aid disbursement and repayment to ensure students get the aid they are entitled to by law.
Why aren’t the government’s data systems better intertwined? If we just make agencies better at working together, isn’t this how we get a more efficient? Sure. But nothing is that simple. Every single agency has some overlapping but mostly distinct laws that lay out what they can and cannot do, including what they can and cannot do with peoples’ data.
Setting up data sharing agreements between agencies takes months of coordination and negotiation before legal agreements are signed. Then the government must go through the job of actually implementing the data exchange, ensuring the data means the same thing in each system, that data privacy and retention rules are followed, that the systems are exchanging the correct file types at the right cadence, and that the data are being fed into other systems so that people actually get the intended benefit.
For example, the government has multiple agencies that process payroll. If FSA was to set up a data-sharing agreement with, oh, the Department of Defense to automatically certify DoD employees for PSLF, FSA and DoD would need to figure out how DoD logs and measures employee tenure, if those elements match the program requirements for PSLF, and how to handle the million nuances of the comings and goings of federal employees. And those data fields and rules aren’t an easy copy-paste if you wanted to do the same thing with another agency that processes payroll, like GSA.
It’s all a lot, and while the law is just vibes at this point, this change would require a whole lot of cruising through long-established law, and I doubt that agencies, Congress, and the judiciary would be down for that. And honestly, I doubt the actually smart political appointees at the Department of Education are down for this, either. My biggest fear is that all of this uncertainty and executive riff raff will distract the already strained staff at ED and FSA from being able to focus on actually making things work, rather than just making things different. I’ll do another post reading the tea leaves on all of this soon, but I feel like I’ve dunked enough on this one.
As always, I appreciate you.