Project 2025 Proposes Privatizing the Federal Student Loan System. Here’s What Students Need To Know.

A common thread between President Joe Biden’s efforts to erase wide swaths of student debt and Heritage Foundation’s Project 2025 manifesto is the admission that the federal student loan system is broken.

But as Biden in the last months of his presidency is fighting to erase billions in federal student loan debt for millions of borrowers, Heritage Foundation’s proposal calls for an end to the current federal student loan system in favor of a private replacement.

The conservative think tank’s Project 2025 proposal places privatization of the federal student loan system as a pillar of its playbook of actions that a second Donald Trump administration could take in its first 180 days “to bring quick relief to Americans suffering from the Left’s devastating policies.”

With millions of borrowers drowning in federal student loans, Project 2025 argues that the federal government is not incentivized to make “sound lending decisions,” but that private lenders would benefit both students and taxpayers.

Student loan experts, however, doubt the viability of such a privatization plan.

Jason Delisle, a nonresident senior fellow at the think tank Urban Institute, told BestColleges that he’s been in rooms with people who have advocated for a privatized loan system. But once you start explaining what that future would look like, those advocates often reverse course.

“I think these kinds of possibilities are not very real, first of all,” he said. “The minute you start showing folks what that might look like, they say, ‘Wait, we can’t have a federal program like that.'”

Still, as the November election approaches with polls showing a tight race, the possibility of a second Trump presidency makes it important to game out what a privatized student loan system might look like.

It wasn’t too long ago that private banks did have a sizable role in the student loan system.

Before 2010, banks used to disburse loans to college students. However, the federal government backed the loans, provided the money, and set the terms. The banks facilitated payments and disbursements.

Today, the Department of Education (ED) handles the federal student loan system on its own.

Delisle said that some would like to see a return to the pre-2010 system.

“I think when people talk about reversing back to 2010, that’s not really privatizing it because it’d still be a huge government program,” he added.

Additionally, when private companies manage student loans, there is less incentive for them to enroll borrowers into helpful programs like income-driven repayment (IDR). Sara Partridge, associate director of higher education at the Center for American Progress (CAP), told BestColleges that private lenders have a long history of predatory and abusive practices.

“We’ve seen a history of issues in this area,” she said, “and it’s not the direction we want to go down.”

The alternative is no federal involvement in student loans at all.

This idea quickly devolves into a bleak picture for higher education in the U.S., Delisle said.

When banks control all loans, they also hold all the risk. Currently, virtually all U.S. citizens can qualify for federal student loans, no matter what degree they are pursuing or what their background is. As soon as all loans are privatized, this changes.

Banks will likely only lend to students banks believe will be able to pay back their loans in full, he said.

That might mean refusing to make loans to students attending community colleges because graduates from community colleges don’t often earn as much as those from four-year universities. Or, that might mean refusing to make loans to students entering programs like social work because social workers generally don’t earn high incomes.

“That’s the thing that people don’t want,” Delisle said.

These practices will eventually lead to disparate impact lawsuits.

Disparate impact describes when seemingly neutral actions unfairly negatively affect a protected group of people, Delisle said. Women are more likely to become social workers, and Black students attend community colleges at higher rates than other racial groups, so banks refusing to provide loans to these students will likely be sued.

Partridge added that students who do receive loans may see worse terms on those loans.

Federal student loans are unique in that there are multiple payment plans, forbearance options, and loan cancellation opportunities. She stressed that these don’t always exist with private student loans, so these debts are more likely to follow students for the rest of their lives.

“I think if we were to move entirely toward a private market, I think we would see the groups most vulnerable to predatory tactics hurt the most,” Partridge said.

Despite the wishes of some, it seems unlikely that the U.S. would ever completely ditch the federal student loan system.

“A lot of [this desire] is a knee-jerk reaction to dissatisfaction with a big government program,” Delisle said.

Instead, some reforms to the system might be more appropriate. That might look like caps on graduate school borrowing or forcing colleges and universities to have a stake in their students’ outcomes.

“Those things, I don’t know how politically viable they are now, but if we saw some reform, that’s the reform we’re likely to see,” he said. “It actually gets you what the privatizing people want.”

Full privatization of student loans, however, is simply not feasible at this point, Partridge said. There may be flaws with the current system, but that doesn’t mean it’s worth abandoning.

“Moving toward the private lending market is not the solution,” she said.