Unpacking the SBA’s Involvement in Student Debt Management: What You Need to Know

On March 21, President Trump announced that the United States Department of Education’s portfolio of student loans would be transferred to the Small Business Administration (SBA). Moving this portfolio, currently totaling nearly $1.7 trillion, means that federal student loan borrowers would be making payments to and relying on the SBA for support. 

While Trump said the transfer would take place “immediately,” the change would first require Congressional approval. Meanwhile, the move could ultimately make it harder for borrowers to manage their loans, especially given that the SBA also announced on March 21 it would cut 43% of its staff.

Background on SBA and Student Debt

As the name implies, the Small Business Administration (SBA) provides services to small businesses, including by backing business loans offered through partner lenders. The SBA was also tasked with handling COVID-19 relief programs; as a result, it went from managing a portfolio of $143 billion pre-pandemic to administering over $1.2 trillion in aid.

Yet the COVID Lending Programs were rife with issues, including an estimated $200 billion in suspected distributions to fraudulent recipients. Part of the issue may have been that the SBA lacked sufficient capacity to handle the new workload, with the agency having to quickly hire contractors for processing and underwriting support. However, contractor errors, such as failing to verify bank account and address information, may have contributed to tens of billions in fraud.

Challenges Facing the SBA

Considering the SBA already struggled to manage pandemic-era relief, giving it an even larger amount of money to oversee while cutting 43% of its staff could prove to be logistically challenging.

Even if the SBA were sufficiently staffed, its employees likely wouldn’t have prior experience managing the different student loan programs and repayment plans. This inexperience may introduce a greater risk of payment errors and longer wait times for those seeking customer support. Some borrowers may even have their monthly payments and/or interest rates erroneously raised, or their payments might be incorrectly recorded and their credit harmed.

“This can only result in borrowers experiencing erratic and inconsistent management of their federal student loans. Errors will prove costly to borrowers and, ultimately, to taxpayers,” said Jessica Thompson, senior vice president of the Institute for College Access & Success (TICAS), in a statement.

The Bottom Line

While it’s difficult to say exactly what will happen if the federal student loan portfolio is transferred to the SBA, there’s a reasonable concern that the agency currently lacks sufficient staff and experience to adequately administer such a large amount of debt.

The Trump administration may overcome these potential stumbling blocks by switching federal student loans from a direct lending model to one where loans are guaranteed by the government but issued by private lenders, similar to how the SBA handles the bulk of its business lending. If that’s the direction the government decides to go, it could also mean the end of certain benefits of federal student loans, such as access to debt forgiveness and discharge programs.