The federal student loan portfolio isn't an attractive asset

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President Trump's executive order to dismantle the Department of Education included moving the $1.6 trillion federal student loan portfolio "to an entity equipped to serve America's students." The department recently followed that announcement by stating it will begin collections on defaulted loans. While we don't yet know the administration's full vision for student loans going forward, the existing portfolio can't be ignored. And if the department is working toward the goal of shopping the full student loan portfolio to a private entity, buyers need to be aware of what they're getting.

President Trump has proposed a transfer of the portfolio to the Small Business Administration, but he only has authority to shift matters that "relate primarily to small-business problems" to the SBA. Presidents Eisenhower and Ford put the SBA in charge of winding down smaller agencies and programs after they were eliminated by Congress. By contrast, the Direct Loan Program is the single largest lending program the government has ever created, encompassing over $1.57 trillion in debt owed by 44 million Americans. Instead, the president may consider a separate law, which allows the department to sell direct loans to a private buyer, provided that the sale "not result in any cost to the Federal Government." 

The "cost" of all things in the Direct Loan Program — from congressional budgeting to regulatory proposals — is calculated based on the Federal Credit Reform Act, or FCRA. Under this accounting method, the department estimates the net present value of future cash flows (repayment of interest and principal) versus the cost to the government of borrowing money from Treasury and collecting the loan payments. The department's most recent analysis estimated a positive subsidy cost to the government of approximately 31 cents on the dollar — meaning the breakeven price on a sale of the portfolio is around $1.08 trillion. 

This figure is almost certainly wrong. It is calculated using a proprietary model (the Student Loan Model) whose data inputs and assumptions have proven wildly off base. For three years running, an independent auditor has been unable to provide an opinion on FSA's balance sheet "because of errors identified in the underlying data used to calculate" the cost of the program. 

Even assuming accuracy, no private buyer would pay the government's breakeven price. If part of a larger transaction — for example, advantageous standing as a private student lender — it could make sense for certain entities. A private entity might tap unrealized value in the portfolio — for example, in the reams of data collected by the department — for unrelated commercial activities.

But as a freestanding deal, the spread between government cost and private value will always be large. A significant portion of the future cash flow depends on the federal government's status as a "supercreditor" of sorts. Department of Education data shows that in 2022, there were more than 1 million borrowers with loans that had been in default for 20 years or more. A private creditor would have long ago written off these loans, but the department books them with value. It has no statute of limitations when collecting and can offset tax refunds and Social Security benefits (which are statutorily protected from private creditors). These seamless and inexpensive collections — the department can also garnish borrowers' wages without obtaining a court order — would not be available to a private purchaser.

Additionally, sovereign immunity shields the federal government from liability for damages caused by systemic failures in servicing; a private buyer would not enjoy that same immunity. Even federal contractors servicing these loans have been forced to pay damages to borrowers for shoddy servicing, forbearance steering and inaccurate bookkeeping. The risk exposure will certainly grow, as the administration's cuts to the government further reduce oversight and auditing resources.

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Finally, the government counts on collecting loans even when it knows — but the borrower does not — that the loan is eligible for discharge. This includes discharges for closed schools and false certifications, which the department estimated in 2024 to account for $7.6 and $27.2 billion in the net present value of the portfolio, respectively. Unlike the government, a private entity may face financial liability for collecting on such loans. 

In 2019, the Department of Education commissioned McKinsey to assess the value and credit profile of the direct loan portfolio. The results were not good: An estimated 45% of the portfolio was not expected to ever be repaid, government assumptions notwithstanding. Notably, this was before the massive and unprecedented disruption in servicing engendered by the pandemic payment pause. 

One of the difficulties in valuing the federal student loan portfolio is that the exact loan payoff amount and period are unknown at origination and remain contingent throughout the life of the loan. By law, borrowers can choose various repayment plans; prepay or consolidate; and defer payments. Moreover, accrued, unpaid interest and fees can capitalize at various points; and interest and principal can be forgiven for public service, disability and death. Limiting or removing these repayment terms would increase the value of the portfolio, but neither the president nor a private buyer has the authority to do this. The promissory note issued with every direct loan incorporates the repayment protections guaranteed by law, and the department cannot retroactively change the terms of repayment for existing loans. Congress potentially could, but not without compensating student borrowers.

Congress could take steps to bring down the breakeven price of the student loan portfolio and facilitate its sale. It could exempt student loans from the accounting method of the FCRA, perhaps in favor of a fair-value method. This would be a double-edged sword, eliminating balance-sheet savings some lawmakers hope to achieve by making forward-looking cuts to the program in budget reconciliation.

Other legislative moves would benefit both borrowers and prospective buyers: Congress could waive sovereign immunity, reinstate the protection against collection of Social Security benefits or impose a statute of limitations. For its part, the Department of Education could interpret the Higher Education Act to mandate, rather than simply allow, automatic discharge of loans that meet statutory requirements, without requiring a borrower application.

One thing is clear: Inflated valuation flows from distorted incentives, with borrowers and taxpayers bearing the brunt. Sale or not, it's time for lawmakers to have an honest conversation about the actual cost of the federal student loan program.