Court Blocks Trump From Transferring Student Loan Portfolio — What It Means For Borrowers

Forbes

23-05-2025

A federal court in Massachusetts issued a major order on Thursday blocking President Donald Trump and Education Secretary Linda McMahon from dismantling the Department of Education and transferring the federal student loan portfolio to another agency. The court concluded that the administration's unilateral actions without approval by Congress were unlawful. The ruling also instructs the department to reinstate scores of fired employees, which could have implications for thousands of federal student loan borrowers.
'The Department's role in education across the nation cannot be understated: it administers the federal student loan portfolio, provides research and technological assistance to states and their educational institutions, disburses federal education funds, and monitors and enforces compliance with numerous federal laws,' reads the decision. 'Congress enacted these laws to promote equality and anti-discrimination in schools, assist students with special needs and disabilities, ensure student privacy, and much more.'
Here's what the ruling does, and what it might mean for millions of federal student loan borrowers.
The ruling was issued after a group of Democratic-led states, school districts, and labor unions filed legal challenges against the Trump administration over efforts to dismantle the U.S. Department of Education and transfer the federal student loan portfolio to another federal agency. The groups had argued that such actions were illegal without approval by Congress, as Congress established the department and its mandatory functions through legislation.
In March, President Trump issued an executive order calling for the Department of Education to be dismantled.
'Closing the Department of Education would provide children and their families the opportunity to escape a system that is failing them,' said Trump in the order. 'Closure of the Department of Education would drastically improve program implementation in higher education. The Department of Education currently manages a student loan debt portfolio of more than $1.6 trillion. This means the Federal student aid program is roughly the size of one of the Nation's largest banks, Wells Fargo. But although Wells Fargo has more than 200,000 employees, the Department of Education has fewer than 1,500 in its Office of Federal Student Aid.'
Some student loan borrower advocacy groups noted that it was odd that, shortly following this statement about the relatively small number of department staff, the Trump administration announced massive layoffs and staff buyouts at the Department of Education to further shrink its workforce. As a result, the Office of Federal Student Aid was effectively cut in half.
'Today's reduction in force reflects the Department of Education's commitment to efficiency, accountability, and ensuring that resources are directed where they matter most: to students, parents, and teachers,' said Secretary of Education Linda McMahon in a statement at the time. 'This is a significant step toward restoring the greatness of the United States education system.'
Critics argued that the layoffs essentially amounted to a dismantling of the Department of Education from within. Shortly thereafter, President Trump unexpectedly announced that the administration would transfer the department's federal student loan portfolio to the Small Business Administration.
'I've decided that the SBA, the Small Business Administration, headed by Kelly Loeffler, will handle will all of the student loan portfolio,' Trump said to reporters at the White House in March. The transfer will happen 'immediately,' he said, although it would be impossible for such a significant administrative change to happen instantly. As of May, the federal student loan portfolio remains at the Department of Education.
In the decision issued on Thursday by a federal district court judge in Massachusetts, the court ordered the Trump administration to halt all efforts at shutting down the Department of Education or transferring the federal student loan portfolio to other agencies.
'The Agency Defendants are enjoined from carrying out the reduction-in-force announced on March 11, 2025; from implementing President Trump's March 20, 2025 Executive Order; and from carrying out the President's March 21, 2025 Directive to transfer management of federal student loans and special education functions out of the Department,' said the court in the ruling. 'The Agency Defendants are enjoined from implementing, giving effect to, or reinstating the March 11, 2025, the President's March 20, 2025 Executive Order, or the President's March 21, 2025 Directive under a different name.'
The court also ordered the department to reinstate all staff who had been fired pursuant to the March 'reduction in force' directive.
'The Agency Defendants shall reinstate federal employees whose employment was terminated or otherwise eliminated on or after January 20, 2025, as part of the reduction in-force announced on March 11, 2025 to restore the Department to the status quo such that it is able to carry out its statutory functions,' said the court.
'The dramatic cuts to FSA will undermine FSA's ability to monitor and fix existing and new servicing issues,' reasoned the court, noting that student loan servicing problems are no longer being actively monitored by the department. 'And in the longer term, 'FSA is now like a house of cards' incapable of withstanding 'any coming shocks to the federal student loan system,' wrote the judge.
Indeed, the Department revealed in a court filing last week that there is backlog of nearly two million applications for income-driven repayment plans, a type of federal student loan program that offers borrowers affordable student loan payments and a path to eventual student loan forgiveness. And department officials have barely put a dent in a separate backlog of nearly 50,000 PSLF Buyback applications, a new component of the Public Service Loan Forgiveness program.
'It is outrageous and unacceptable that at a time when the Department of Education is being gutted, with its main energy and focus on acting as a debt collection agency, millions of borrowers are being denied their legal right to an affordable repayment option,' said Randi Weingarten, President of the American Federation of Teachers, which sued the Trump administration in March over stalled IDR applications.
The new court ruling may be welcome news for many federal student loan borrowers. The court ordered the Trump administration to 'file a status report with this Court within 72 hours of the entry of this Order, describing all steps the Agency Defendants have taken to comply with this Order, and every week thereafter until the Department is restored to the status quo prior to January 20, 2025,' suggesting there will be rigorous court oversight of the administration's compliance. However, the administration is almost certain to appeal the ruling.
In the meantime, House Republicans on Thursday passed sweeping reconciliation legislation that would fundamentally reshape the federal student loan system. Among other provisions, the bill would repeal several popular student loan forgiveness and repayment programs. Advocacy groups have argued that if the legislation is enacted, it could have devastating consequences and increase the monthly payments for millions of student loan borrowers as they forced to change repayment plans. It is unclear whether the Department of Education could successfully implement such massive systemwide changes effectively with a severely diminished staff.