When Student Debt Becomes a National Liability

This column examines how the Trump administration’s efforts to dismantle the Department of Education extend far beyond reducing federal bureaucracy. By shrinking the Department and restructuring federal student loan programs, these changes have limited access to protected federal borrowing, increased reliance on private lenders, and shifted financial risk onto students and families. The resulting impacts of this affect college enrollment, access to graduate and professional education, workforce development, and consumer spending, with long-term consequences for labor supply, economic growth, and social mobility.

Changes to The Department of Education

On March 20, 2025, President Donald Trump signed an executive order directing the Secretary of Education to begin dismantling the Department of Education. By doing so, it would return the authority of education to the states. The idea behind this decision was that it would reduce federal bureaucracy while increasing local control. To achieve this goal, the Department of Education was significantly reduced in size. These changes to the Department of Education are forcing states to assume full responsibility for programs previously managed at the federal level. This transition causes more than just an administrative shift; it places a critical financial strain on state governments. As significant federal grants are removed, states are being forced to make difficult choices, such as raising taxes or stripping away specialized services in order to compensate for their losses.

At the beginning of 2025, the Department of Education employed approximately 4,166 workers. In March of that year, staffing had been cut by nearly 50 percent, leaving the Department of Education with about 2,400 employees. As of 2026, the workforce consists of approximately 2,000 employees. In addition to staff reductions, many core functions were redistributed to other federal agencies, including the Departments of Labor, Interior, Health and Human Services, and State. This restructuring aimed to weaken the federal education oversight while continuing to shrink the Department itself. 

Changes to Repayment Plans

The Department of Education manages approximately $1.6 trillion in federal student loan debt; however, downsizing the department has made managing that debt difficult. Borrowers have reported delays, poor communication, reduced access to assistance, and overall inadequate services; all direct consequences of staffing cuts. The most significant changes to Department operations involve repayment plans. Prior to the Trump administration changes, borrowers could choose from several Income Driven Repayment, IDR, plans. The simplest of these IDR repayment plans were known as Income Based Repayment (IBR), Pay As You Earn (PAYE), and Revised Pay As You Earn (REPAYE). Also implemented under Biden’s administration was SAVE, which allowed borrowers to make payments at a percentage of their income. Some individuals, who were low-income, could have payments as low as zero dollars. But given changes under the Trump administration, many of these plans were consolidated into a singular Repayment Assistance plan (RAP). While still linked to income, the new plan eliminates zero-dollar payments and requires all borrowers to make a minimum monthly payment, regardless of income. The primary reason monthly bills are rising is due to a fundamental change in the calculation. Under the old SAVE plan, the government accounted for essential expenses such as food and rent. It protected the first $35,000 of your income, then calculated the payment on the amount left over. The new RAP plan removes this protection entirely. It ignores your baseline living expenses that SAVE once accounted for. Instead, it calculates your payment using your entire adjusted gross income. The plan also offers weaker interest protections, allowing balances to grow more quickly and over longer periods of time. By extending forgiveness to 30 years, RAP keeps borrowers in debt a decade longer than what previous plans like SAVE or PAYE offered. This is bad for the borrower because if the borrower misses even a small payment, their unpaid interest is added directly to the principal balance. Once this interest is capitalized,  it creates a “snowball effect” where the borrower is then charged interest on their interest. This causes the total debt to increase rapidly and exceed the original amount borrowed quickly. This persistent, growing balance leads to economic stagnation within the individual. By putting such a large portion of their income into repayment, borrowers are forced to withdraw from consumer spending. 

Loan forgiveness under this system is uncertain as well. Before Trump’s executive order, Loan forgiveness was a program that would release the borrower from the obligation to pay their debt, given they met certain criteria. Some examples of these criteria included working in public service for 10 years or having not paid back the full loan amount after 20-25 years of working with an IDR plan. Such clear terms gave borrowers long-term planning options and some idea of what their futures may look like. Allowing people to focus on other routine expenses and providing ample motivation to stick with a career in public service. Now, many borrowers are left in the dark regarding how their futures will play out, as was not the case previously.

Four Loan Types and Why They Matter

Borrowing options, or loan types, are also changing rapidly. Previously, graduate students and parents of undergraduate students could borrow the full cost of attendance through Federal PLUS loans. But the Trump administration has done much more than just cut staffing and dissolve comprehensive repayment plans into the new (and very limited) Repayment Assistance plan. Ultimately, the administration has shifted federal education policy away from broad access to student loans with borrower protection and toward new policies that impose tighter lending limits and redefine which educational programs warrant federal financial support. The programs affected by the redefining of education include: nursing, social work, physical therapy, public health, and education. These “nonprofessional” programs are strictly capped at borrowing $20,500 in direct unsubsidized loans. Graduate PLUS, which once covered the full cost of attendance, will no longer be offered. Because the Repayment Assistance Plan (RAP) only applies to federally eligible programs, any student forced out of financial aid is also stripped of the protections offered by RAP. This forces these borrowers into a standard repayment program, which is considered a major step backward for borrower protection. 

While RAP offers forgiveness after 30 years, these standard programs provide no such relief. The borrower must pay until their balance is zero. Over a 20-30 year term, interest accumulation can force an individual to pay back double or triple the amount originally borrowed. Furthermore, standard plans eliminate the “income shield” offered by RAP. Instead of calculating payment based on salary, the government will expect a fixed amount every month. Regardless of the borrower’s financial situation. Leaving the most vulnerable of borrowers with no safety net. The federal government is moving away from its role as a primary education lender. 

The first type of loan we’ll examine is a Federal PLUS loan, one of the surviving loan types. These loans are designed to cover education costs that haven’t been met by financial aid or standard federal student loans. The main differentiation between a Federal PLUS loan and a standard federal loan is that Federal PLUS loans are approved based on credit checks, rather than financial need. Although these PLUS loans carry higher interest rates, they still offer federal protections such as the Repayment Assistance program, deferment, and potential loan forgiveness, which private loans do not. 

Secondly, parents of dependent students can still take out Parent PLUS loans. These loans help protect students because the parents are responsible for the loan, not the student, as would be the norm for standard federal loans. As of now, Parent PLUS loans are subject to stricter borrowing caps. Parent PLUS loans are shifting from an unlimited borrowing model to strict caps of $20,000 annually and $65,000 over a student’s lifetime. 

Graduate PLUS loans were a federal loan available to graduate and “professional” students in order to help cover the cost of education. These typically exceeded what traditional unsubsidized loans provided. As of July 1, 2026, this program will be entirely eliminated. In the wake of Graduate PLUS loans’ elimination, the only option for many students has been to struggle with the new borrowing limits that will significantly restrict access to graduate education.

Due to the eliminations and limitations of these PLUS-type loans, Students have been forced to turn towards private lenders. Private lenders are profit-driven corporations. Their loyalty is to their shareholders, not the borrower. They use many different tactics that can trap the borrower in a cycle of debt. A typical tactic lenders use on borrowers is steering them into forbearance. Borrowers think that forbearance is a positive, when in reality, forbearance pauses payment but allows interest to keep accumulating and add to the principal. Making the loan overall more expensive.

These lenders used to be considered a last resort due to their lack of the essential safety nets that make federal loans so manageable. Unlike federal options, private loans are commercial products designed only for profit. Once a borrower signs the contract, they are almost always locked in until the debt is fully satisfied. Perhaps most importantly, these loans frequently feature variable interest rates. While federal loans offer fixed rates that allow for predictable budgeting, variable interest rates can change at any moment due to market shifts. A rate that initially appeared to be “cheap” can double without warning, leaving the borrower in a worse financial position.

PLUS loans were by no means a perfect system, yet they offered fixed interest rates, had deferment options, allowed income-driven repayments, and could qualify for loan forgiveness. Now, individuals who are forced toward private lenders must face little flexibility for payments, no forgiveness, and higher risk. 

Effects on College Enrollment

Students today must increasingly weigh the financial risk of a degree against its potential return. Especially those in socially essential but lower-paying fields like education, social work, and physical therapy. When the cost of tuition is almost identical to the average starting salary, the lack of safety nets creates a debt trap. Forcing the borrower into decades of high-interest debt that outlasts their low wages.

Reliance on private lenders, fewer repayment options, and limited loan forgiveness possibilities have changed the calculation that young people make regarding higher education. Federal safeguards once allowed students coming from limited-resource backgrounds to pursue higher education, and doing so while managing risk. Now, more individuals must consider the crushing long-term consequences of debt. 

Most colleges are tuition-dependent. When enrollment drops, the resulting revenue loss will force smaller, or niche, campuses into closure or acquisition. Even larger institutions may shut down satellite campuses. These serve as vital lifelines for first-generation, low-income, and adult learners who are unable to relocate. These closures often end academic journeys prematurely. Ultimately, lowering the region’s overall educational attainment.

Effects on the Economy

For decades, federal student loans were designed with built-in protections that “shielded” students from a lifetime debt sentence. The new restructuring dismantles this safety net. Forcing the risk of loan default and interest growth onto the individual borrower, rather than the government. This may discourage enrollment in professional programs and graduate programs. Particularly in fields such as healthcare, education, and social services. Reduced access to careers in these fields increases the likelihood of labor shortages in critical areas for economic growth. 

Understaffing in “non-professional” but socially essential fields creates a dangerous ripple effect that can compromise both public safety and long-term economic stability. In healthcare, major shortages may lead to higher nurse-to-patient ratios. This causes medical staffs to be stretched thin, potentially leading to a breaking point that could result in higher mortality rates. 

Education faces a similar crisis. Underqualified staff and larger classrooms will result in lower student achievement. This doesn’t just mean lower test scores, but it also threatens the intelligence of future generations. In addition to a widespread decline in cognitive development and critical thinking skills, parents may be forced to step into teaching or caregiving roles. This will cause the removal of millions of productive workers from the economy. Draning billions from the economy in lost productivity. 

Putting student loan risk on the individual, rather than the federal government, can reshape consumer behavior, spending, and economic growth. This is due to borrowers prioritizing mandatory loan repayments over discretionary spending. Household spending will drop dramatically, directly impacting economic stimulation. 

An increase in private loans will force individuals to prioritize repayment over spending. This reduces the demand for major purchases such as homes. The purchase of homes is extremely important because they support industries such as construction, manufacturing, and professional services. Construction is considered to be a leading indicator for the direction of the economy. If building slows, recession is near; however, when it booms, the economy follows. It also increases “secondary spending” on maintenance and furniture. Without these industries, our economy will see a negative turn.

Lower disposable income will also delay family formation. When millions of households simultaneously experience these constraints, economic growth will slow. Federal student loan programs provided stability, which allowed millions of people to remain active participants within the economy. Forcing responsibility and vulnerability on the individual borrower will reduce consumer spending while weakening consumer demand. 

As the “return on investment” for a degree diminishes, many students may no longer pursue higher education entirely. This creates a less competitive workforce and stunts the GDP growth typically influenced by high-skilled workers. Leading to stagnation in national innovation and productivity.

Over time, narrowing access to higher education reshapes the workforce. Students may inevitably choose income stability over advanced training, leading to fewer skilled professionals, slower innovation, and a workforce that is more risk-averse, less adaptable, and less diverse.

Takeaway

The restructuring of the Department of Education has shifted higher education from a public good to a high-stakes personal financial risk. The dismantling of federal safety nets and stricter borrowing caps imposed by the Trump administration is forcing essential workers into predatory private debt traps. These changes create dangerous effects across the economy. Rising debt lowers consumer spending, delays lifetime economic milestones, and risks a permanent shortage of skilled labor within crucial industries.