Could The Federal Government Re-Privatize Student Loans?

Calls for the federal government to get out of the student loan business have surfaced periodically, particularly among Republicans.

For example, the Department of Education chapter in the Project 2025 document proposes reviving the old Federal Family Education Loan (FFEL) program to “privatize all lending programs, including subsidized, unsubsidized, and PLUS loans (both Grad and Parent).”

Advocates argue that privatization would introduce market-driven accountability, pricing and consumer choice into higher education financing, while redefining the federal government’s role as a guarantor rather than a direct lender.

But, is a return to FFELP a practical and effective solution? 

History Of The FFEL Program

Before its discontinuation on June 30, 2010, the FFEL program enabled private lenders — including banks, credit unions and other financial institutions — to make federal student loans guaranteed by the federal government. These guarantees covered defaults, with guarantee agencies stepping in to purchase defaulted loans on behalf of the U.S. Department of Education. Additionally, lenders received special allowance payments to ensure a market rate of return.

At its peak, the FFEL program disbursed $63.8 billion in new federal loans during the 2008–2009 academic year. By 2010, outstanding FFEL loans totaled $516.7 billion, spread across 25.1 million borrowers. Since the program’s discontinuation, the portfolio has steadily declined as borrowers repay, discharge, or default on loans. 

Today, $165.4 billion in FFEL loans to 7.3 million borrowers remain outstanding, of which $65.8 billion to 2.4 million borrowers is still held by commercial lenders.

In comparison, the rest of the federal student loan portfolio now consists of $1.47 trillion in Direct Loans owed by 38.2 million borrowers, alongside nearly $100 billion in FFEL loans owned or managed by the government.

The Health Care and Education Reconciliation Act of 2010 shifted all new federal education loans to the William D. Ford Federal Direct Loan Program starting on July 1, 2010.

Related: Student Loan Statistics

Federal Student Loans Are Operated At A Loss

It’s important to note that the U.S. Government loses money on student loans.

Currently, only Parent PLUS loans generate a net profit for the federal government based on program costs as calculated under the Federal Credit Reform Act of 1990. Even these loans operate at a loss when assessed under Fair Value Accounting standards.

As a whole, the federal student loan portfolio loses money. Several factors contribute to the overall losses:

• Below-market interest rates on federal loans.
• Loans are made without regard to a borrower’s future ability to repay the debt.
• Subsidies embedded in income-driven repayment plans, which can reduce loan obligations by as much as 63%.
• Financial impacts of the pandemic-era payment pause and interest waiver.

Claims that privatization would save money primarily stem from eliminating federal student loan forgiveness and discharge programs and from eliminating outlays from specific loan programs, not from operational efficiencies.

Benefits Of Privatization

Privatizing federal student loans could offer several advantages:

Disadvantages Of Privatization

However, privatizing student loans is not without its downsides:

Practical Considerations

Congress is unlikely to approve legislation to privatize federal student loans, as such a move would not reduce the federal budget deficit. Furthermore, backlash from borrowers and advocacy groups concerned about college access, affordability and borrower protections could hinder privatization efforts.

The process itself would be administratively burdensome and could mirror the complexities seen during the restart of federal loan repayment after the pandemic. 

How Could Privatizing The Existing Student Loan Program Work?

Privatizing student loans could involve selling the existing Direct Loan and federally-held FFEL portfolios to private lenders, while reinstating the FFEL program for new loans. However, this approach would not amount to full privatization, as loans would still operate under their existing federal terms and conditions (i.e. the loan agreement).

Most private lenders lack the appetite to take on federal loans, even with guarantees and subsidies.

Private lenders may also lack both the financial capacity and administrative capacity to acquire the loan portfolio. The FFEL portfolio, which was never more than a third the size of the current Direct Loan portfolio, was funded through a combination of incremental bond issues and securitizations through the capital markets. 

If a private lender were to acquire the Direct Loan portfolio (or parts of it), it’s likely they would contract with the existing loan servicers to provide borrower administration, as lenders themselves wouldn’t be able to ramp up a servicing organization to handle the loan portfolio. As such, borrowers would still likely work with companies like MOHELA and Aidvantage for their student loans.

Alternatives To Privatization

If privatization proves impractical, other approaches could be considered:

This means that higher-risk borrowers might be prevented from enrolling at higher-cost colleges, since they would be unable to obtain loans to pay the cost. Instead, they might have to enroll at in-state public colleges and colleges with “no loans” financial aid policies, which tend to be less expensive. 

Final Thoughts

While privatization may offer some benefits, its disadvantages and logistical challenges make it an unlikely and potentially costly solution.

Instead, targeted reforms to improve efficiency, reduce risks, and balance access with sustainability may be more practical alternatives for addressing the federal student loan system’s shortcomings.

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