I. Introduction

The Department of Education (ED) under President Donald Trump has broadly retreated from efforts to protect borrowers from student-loan servicing abuses. Under Secretary Linda McMahon, ED has dismantled accountability mechanisms and cut staff responsible for protecting borrowers. The federal government relies on five outside servicers, including MOHELA, Nelnet, EdFinancial, Maximus Education, and Central Research, to manage borrower accounts. These contractors have long faced criticism over billing errors, mishandled applications, and misleading information. The retreat has coincided with a wave of student-loan defaults; as of July, approximately 9.5 million people, or one in five federal borrowers, were in default. It also comes amid a weak labor market for recent graduates. In 2025, their unemployment rate averaged 5.3 percent, compared with 4 percent for the broader workforce. That year, the Republican-controlled Congress passed the “One Big Beautiful Bill Act” (OBBBA), which eliminated Grad PLUS loans and imposed new borrowing caps while allocating $1 billion to implement changes to the federal student-loan program. Though ostensibly intended to address the default crisis, the fund stands to enable further servicer abuses without meaningful transparency or accountability requirements.

The lack of transparency is especially concerning because student-loan servicing is an explicit use of the appropriation. Rather than holding servicers accountable, the administration has created a billion-dollar fund that could keep the same contractors profitable. In a September 2026 letter to McMahon, Sens. Elizabeth Warren (D-MA), Jeff Merkley (D-OR), Cory Booker (D-NJ), and Chris Van Hollen (D-MD) raised concerns about the lack of public information surrounding the fund. ED has already obligated approximately $216 million without providing an itemized account of how it was allocated. Amid record defaults, the fund stands to support a servicing system that has harmed millions of borrowers.

II. Federal Funding and Contractor Misconduct

BACKGROUND

During the 2010s, skyrocketing higher education costs put the student-loan debt crisis at the forefront of economic policy debates. The COVID-era student-loan forbearance period represented an unprecedented federal response to the crisis, giving many Americans optimism about a comprehensive federal solution. The Supreme Court’s 2023 decision to invalidate the Biden administration’s loan-forgiveness plan was both a setback for borrowers and a victory for private servicers under scrutiny. As federal payments resumed in 2023, growing attention turned to servicers’ poor handling of borrower accounts. MOHELA failed to send timely statements to 2.5 million borrowers, after which more than 830,000 missed a payment. The Biden administration responded by withholding $7.2 million from the company. In January 2024, the Biden-era ED withheld another $2 million from Aidvantage, EdFinancial, and Nelnet after more than 750,000 borrowers received late statements.

Alongside these penalties, the department introduced contractual standards for monitoring student-loan servicers. Contracts implemented in 2024 established standards for record accuracy, call quality, and customer service. ED could impose financial penalties, require corrective-action plans, or stop assigning accounts to poorly performing servicers. Following Trump’s election, these limited accountability efforts gave way to an approach more favorable to student-loan servicers and for-profit education companies. During the first Trump administration, Secretary of Education Betsy DeVos eliminated the gainful-employment rule and replaced borrower-defense protections with standards that made relief substantially harder for borrowers defrauded by their colleges. After returning to office, Trump appointed Linda McMahon to oversee his effort to dismantle ED. The OBBBA delayed Biden-era borrower-defense and closed-school-discharge protections until 2035, restoring the DeVos-era standards while new federal borrowing limits pushed graduate and professional students toward private lenders.

RENEWED SCRUTINY IN CONGRESS

In September, lawmakers turned their attention to the administration’s use of the OBBBA fund. As it stands, the ED has not disclosed whether any of the first $216 million went to servicers. A coalition of Senators asked whether the money was used to pay contractors, support default outreach, rehire FSA personnel, or fund the transfer of student-loan functions to Department of the Treasury. The letter notes that an unspecified portion may be used to hire attorneys connected to Sweet v. McMahon, involving hundreds of thousands of borrowers who said colleges, many of them for-profit, defrauded them. The Biden administration agreed to provide relief in 2022; under McMahon, ED missed a court-ordered deadline to process most remaining applications. 

Congressional scrutiny of both ED and its contractors has increased as student-loan defaults rise and federal oversight recedes. In August, Senators opened an investigation after MOHELA reportedly sent false notices stating borrowers were severely delinquent and approaching default. Some borrowers were shown incorrect past-due balances exceeding $10,000. For families struggling with the cost of living, these errors can prompt unnecessary payments, damage credit, and cause financial distress. Without accuracy reviews, similar errors may go unidentified. This scrutiny is a welcome response to ED’s retreat from enforcement. If Democrats regain governing power, these findings should form the basis for restoring performance reviews and imposing real financial penalties on servicers that harm borrowers.

III. Conclusion

The lack of transparency surrounding the fund reflects a broader trend throughout McMahon’s tenure. Alongside cutting the employees responsible for supervising servicers, the administration has gutted teams that investigate colleges accused of misusing federal financial-aid money, including schools that lied to students about employment outcomes or miscalculated Pell Grants. ED also began transferring defaulted student loans to the Department of the Treasury as part of its effort to dismantle the agency, despite concerns that Treasury lacks ED’s experience with borrowers and higher education. For borrowers, contractor errors can mean unaffordable bills, damaged credit, or thousands of dollars wrongly demanded from families. McMahon’s department has cut oversight while refusing to explain how hundreds of millions were obligated. Before allocating the remainder, ED should disclose how the first $216 million was spent and restore mechanisms that made servicers pay for harming borrowers.