Moving Student Loans to the SBA: Know the Risks

On July 14, 2025, the U.S. Supreme Court effectively cleared the way for the Trump Administration to dismantle the U.S. Department of Education by allowing mass layoffs that had been blocked by a federal court.

Although framed as “temporary,” the ruling also enables the Administration to resume its push to transfer the student loan system to the Small Business Administration—an agency with limited staffing, no experience in high-volume student lending, and a comparatively small loan portfolio.

If the Administration ultimately prevails in McMahon v. New York—which now appears likely—only one obstacle will remain before borrowers are exposed to a series of new and alarming risks from the SBA’s takeover of student loans.

If the Administration eventually wins the case, it would still need to persuade Congress to move student loans to the SBA. That would not be likely through regular legislation.

The Republicans only hold 53 seats in the Senate, and getting seven Democrats to defect and deliver the filibuster-proof supermajority of 60 votes would be all but impossible. But the GOP might be able to win that authorization through another reconciliation bill, just like the one signed into law by the president on July 4, 2025. Congressional rules allow for up to three reconciliation bills each year that can be passed with a 51-vote simple majority in the Senate.

If the Trump Administration wins Congressional approval for moving student loans to the SBA after such a parliamentary maneuver, borrowers will likely face several new risks. Here’s our assessment of the main risk exposures for borrowers that could result from such a transfer.

The public tends to underestimate the SBA’s small scale and limited capabilities when compared with the much larger Department of Education. The resulting unrealistic expectations could pose risks for student borrowers, who may find themselves unable to access the support they need and could face repeated problems with online systems and long hold times when calling the SBA.

Aissa Canchola Banez at the Student Borrower Protection Center and Michael Negron of the Groundwork Collaborative both argue that the federal student loan system operates at a scale and complexity that dwarfs SBA’s current capacity. And according to Senior Fellow David Bergeron at the Center for American Progress, unlike ED the SBA has never been set up to provide customer support or billing operations at scale for massive numbers of low-value loans with small payments.

For example, during the 2023 fiscal year, the SBA only wrote 68,000 new loans. But the Education Department’s Federal Student Aid (FSA) division wrote 12.6 million new loans. In other words, that year, the SBA wrote less than 0.5 percent of the loan volume originated by FSA.

Because the average SBA loan value was $500,000, the agency lent a sizable total of $34 billion that year. But that’s still only 38 percent of the total lent by FSA, amounting to $88.4 billion—although at an average of a mere $7,000 per loan.

In general, the SBA doesn’t engage in customer support or billing operations itself, because those functions are performed for the agency in most cases by intermediary private lenders like banks and credit unions. The only loans serviced by the SBA that require direct interactions with customers are several million disaster loans—most of which are legacy Covid EIDL loans—but this portfolio is vastly smaller than the student loan portfolio.

The SBA guarantees loans within only three non-disaster loan programs. Much like student loans before the launch of the federal Direct Loan system in 2010 where the lender became the U.S. Department of Education rather than banks or credit unions, each of these SBA programs relies on private lenders to fund and service their loans. These programs include:

• The primary 7(a) Loan Program, which provides guaranties to lenders that enable them to deliver financial support for small businesses with special requirements. Most small businesses will apply for one of these loans;
• The 504 loan program—the SBA’s long-term, fixed asset economic development program;
• The Microloan program, which writes loans for nonprofit intermediaries that in turn lend the divided proceeds to very small businesses and startups.

But this group of four programs with straightforward requirements markedly differs from the situation at FSA. The Education Department offers a vast assortment of complex student loan products that even leading economists who are experts in higher education finance can find impenetrable. Many of these programs offer different options for key features like payments, deferments, and forgiveness.

What’s more, servicing all these loans is a complicated proposition because FSA and its subcontractors need to explain and differentiate all these complex repayment options to borrowers. Student loan borrowers are entitled to a higher-touch level of support than those in the SBA’s programs as a matter of federal policy. That’s because student loans are intended to provide access to a higher education to students irrespective of their financial circumstances or credit score profile. Unconstrained by such policy objectives, the SBA is free to reject potential borrowers who don’t meet its standards.

Unlike the SBA, FSA maintains long-term contracts with five Direct Loan servicing companies like MOHELA, and each one is a large private enterprise. Ensuring oversight and accountability among these servicing firms is one of FSA’s most important functions and responsibilities because of the long history of documented servicing failures and abuses throughout this industry; such incidents have required repeated interventions by FSA or the Consumer Financial Protection Bureau (CFPB). In fact, Biden’s Education Department launched several accountability and oversight investigations that withheld payments from loan servicing firms because they had breached their contracts with the federal government, and we present one such example at the end of this article.

If the SBA takes control of the student loan system, it would need to quickly build the capacity to manage those subcontractors, along with an array of other commercial and institutional lenders who operate the legacy Perkins and FFEL programs. And since it has no experience supervising high-volume Direct Loan servicing firms, the SBA would probably need to hire managers who previously worked in that capacity for ED.

SBPC argues that prior to taking such steps, a lack of accountability and oversight supervision could enable servicer misconduct and failures to run rampant, “which could push borrowers further into delinquency and default.” But the Trump Administration’s attempts to dismantle both the SBA and the Education Department will deprive both agencies of the staffing levels they need to provide adequate oversight. Trump fired 43 percent of the SBA’s employees in March, a Supreme Court decision the following July makes it unlikely those workers will be rehired, and that court’s order in the McMahon v. New York case will render the Education Department incapable of providing this oversight.

According to an analysis prepared for Senator Elizabeth Warren and the Senate’s Committee on Banking, Housing and Urban Affairs by two University of California law professors, one in 12 American adults now faces a risk of financial injury because of student loans. Only 40 percent of student borrowers are current on payments, with seven million behind on payments and more than six million facing default. Eight million remain enrolled in the Biden Administration’s SAVE Plan, which two federal appellate court rulings have blocked. Two million more borrowers seeking access to more affordable income-driven repayment (IDR) plans had their applications frozen by the Trump administration soon after the inauguration.

Alarming reasons exist why shifting the management of the loan servicing industry from ED to the SBA would create significant risks for borrowers. First, what plans currently exist for moving those responsibilities from ED to the SBA? As late as July 2025, the Trump Administration still hasn’t announced any clear plan to shift the responsibility for overseeing the industry to the SBA, nor has it announced any plans to transfer ED’s expertise in oversight procedures or federal contracting to the SBA.

Second, it remains unclear how the SBA plans to take on the responsibility for servicing an additional $1.7 trillion worth of loans—which is about 16 times the volume of the agency’s current loan portfolio—after firing 2,700 employees who won’t be re-hired. It’s difficult to envision how the agency will be able to manage its relatively small existing portfolio, let alone take on all these new student loans in view of this reduced staffing capacity.

This human resources crisis leads to several specific questions raised by SBPC’s policy analysts:

• Who at the SBA would ensure that borrowers receive the best information about repayment options?
• How would the agency support borrowers who are already delinquent and prevent them from defaulting?
• When servicers make errors, how will the SBA’s staff have the knowledge and experience to spot those mistakes and make corrections?
• Will SBA also oversee the servicing of defaulted borrowers? This group could soon comprise about one-fifth of all borrowers.
• Will the Administration assign the annual responsibility to SBA for implementing the FAFSA and supervising the disbursement of new federal financial aid grants and loans? If so, what expertise will the SBA possess in exercising such a critical responsibility for the higher education community?

In moving the federal student loan database to the Small Business Administration, 43 million borrower accounts would need to be migrated from the Department of Education to the SBA.

What could possibly go wrong?

Any transfer of electronic records between agencies on this scale carries enormous potential for data corruption or loss. History shows two examples like these where significant numbers of student loan borrowers ended up with damaged credit histories through no fault of their own.

First, during the federal Direct Loan system’s launch following the Great Recession of 2008–2009, the Department of Education purchased $110 billion in federal student loans from private lenders. But the data migration was rocky, and Federal Student Aid struggled to correctly integrate these loan records into its systems. As a result, some borrowers experienced unexpected spikes in monthly loan bills or lost the benefits from lower interest rates promised by their original lenders, simply because the new platform didn’t receive the correct data from the banks and credit unions.

Even worse, some payments were not transferred correctly during the migration, causing ED’s system to incorrectly record payments as late or not received. Before ED corrected these mistakes the payment errors had been reported to credit bureaus, and these actions may have resulted in long-term consequences for borrowers even after the errors were corrected within the Education Department’s accounting system.

Second, in a more recent incident during 2023, a transfer of student loan accounts between the two student loan servicers Nelnet and MOHELA produced widespread problems, resulting in what federal legislators called “millions of consumer credit reporting errors.”

The migration, deemed “faulty” by Senator Ron Wyden of Oregon as well as Senator Warren and other lawmakers, caused nearly two million duplicate student loan records to appear on borrowers’ credit reports. These duplications occurred because MOHELA failed to notify the three credit reporting companies—Equifax, Experian, and TransUnion—about each loan transfer from Nelnet. Consequently, many borrowers saw their single loan balances reported twice—once by each loan servicer—and the results falsely inflated their reported debt levels and debt-to-income ratios.

The impact of these errors was substantial, affecting hundreds of thousands of borrowers whose credit scores were inaccurately reported for more than a year. According to the lawmakers’ investigation, over 100,000 borrowers experienced damaged credit scores, with thousands experiencing drops of more than 20 points for as long as 18 months. Such declines can increase interest rates or even prevent access to mortgages, car loans and other credit services, and prompted around 7,500 complaints by borrowers to MOHELA accompanied by disputes filed with the credit bureaus.

In response, lawmakers had urged the CFPB and the Department of Education to investigate and hold the responsible organizations accountable. In turn, the Biden Administration stopped ED from assigning borrower accounts to MOHELA in October 2024 to punish the servicer.

Nelnet then attributed the issues to Department of Education-directed changes and claimed those modifications were beyond its control, while MOHELA insisted it followed federally mandated procedures and disputed the allegations. Credit bureaus acknowledged the misreporting, saying that the duplicate balances have since been resolved. Nevertheless, as late as mid-2025, the full extent of the damage still remains unclear.