Pyrrhic Defeat and the Student Loan Portfolio: How a Managed Meltdown Enables Unauthorized Asset Sales

In classical history, a Pyrrhic victory refers to a win so costly that it undermines the very cause it was meant to advance. Less discussed, but increasingly relevant to modern governance, is the inverse strategy: the Pyrrhic defeat. In this model, short-term failure is tolerated—or even cultivated—because it enables outcomes that would otherwise be politically, legally, or institutionally impossible. When applied to public finance, pyrrhic defeat theory helps explain how the apparent collapse of a system can be leveraged to justify radical restructuring, privatization, or liquidation of public assets.

Nowhere is this framework more relevant than in the management of the federal student loan portfolio.

The federal student loan portfolio, totaling roughly $1.6 to $1.7 trillion, is not merely an accounting entry. It is one of the largest consumer credit systems in the world and functions simultaneously as a public policy tool, a long-term revenue stream, a data infrastructure, and a political liability. It shapes who can access higher education, how risk is distributed across generations, and how the federal government exerts leverage over the postsecondary sector. Precisely because of its scale and visibility, the portfolio is uniquely vulnerable to narrative reframing.

That vulnerability was not accidental. It was constructed over decades through a series of policy decisions that stripped borrowers of normal consumer protections while preserving the financial attractiveness of student debt as an asset. Chief among these decisions was the gradual removal of bankruptcy protections for student loans. By rendering student debt effectively nondischargeable except under the narrow and punitive “undue hardship” standard, lawmakers transformed education loans into a uniquely durable financial instrument. Unlike mortgages, credit cards, or medical debt, student loans could follow borrowers for life, enforced through wage garnishment, tax refund seizure, and Social Security offsets.

This transformation made student loans exceptionally attractive for securitization. Student Loan Asset-Backed Securities, or SLABS, flourished precisely because the underlying loans were shielded from traditional credit risk. Investors could rely not on educational outcomes or borrower prosperity, but on the legal certainty that the debt would remain collectible. Even during economic downturns, SLABS were marketed as relatively stable instruments, insulated from the discharge risks that plagued other forms of consumer credit.

Private banks once dominated this market. Sallie Mae, originally a government-sponsored enterprise, became a central player in both originating and securitizing student loans, while Navient emerged as a major servicer and asset manager. Yet as Higher Education Inquirer documented in early 2025, banks ultimately lost control of student lending. Rising defaults, public outrage, state enforcement actions, and mounting evidence of predatory practices made the sector politically radioactive. The federal government stepped in not as a reformer, but as a backstop, absorbing the portfolio and stabilizing a system private finance could no longer manage without reputational and regulatory risk.

That history reveals a recurring pattern. When student lending fails in private hands, it becomes public. When the public system is allowed to fail, it becomes ripe for re-privatization.

A portfolio does not need to collapse to be declared unmanageable. It only needs to appear dysfunctional enough to justify extraordinary intervention.

The post-pandemic repayment restart, persistent servicing failures, legal challenges to income-driven repayment plans, and widespread borrower confusion have all contributed to a growing narrative of systemic breakdown. Servicers such as Maximus, operating under the Aidvantage brand, MOHELA, and others have struggled to process payments accurately, manage forgiveness programs, and provide reliable customer service. These failures are often framed as bureaucratic incompetence rather than as predictable consequences of outsourcing public functions to private contractors whose incentives are misaligned with borrower welfare.

Navient’s exit from federal servicing did not mark a retreat from the student loan ecosystem so much as a repositioning, as it continued to benefit from private loan portfolios and legacy SLABS exposure. Sallie Mae, rebranded and fully privatized, remains deeply embedded in the private student loan market, which continues to rely on the same nondischargeability framework that props up federal lending.

Crucially, these servicing failures cannot be separated from the earlier elimination of bankruptcy as a safety valve. In normal credit markets, distress is resolved through restructuring or discharge. In student lending, distress accumulates. Borrowers remain trapped, servicers remain paid, and policymakers are confronted with a swelling mass of unresolved debt that can be labeled a crisis at any politically convenient moment.

Under pyrrhic defeat theory, such a crisis is not merely tolerated. It is useful.

Once the federal portfolio is framed as broken beyond repair, the range of acceptable solutions expands. What would be politically impossible in a stable system becomes plausible in an emergency. Asset transfers, securitization of federal loans, expansion of SLABS-like instruments backed by government guarantees, or long-term conveyance of servicing and collection rights can be presented as pragmatic fixes rather than ideological choices.

A Trump administration would be particularly well positioned to exploit this dynamic. Skeptical of debt relief, hostile to administrative governance, and ideologically aligned with privatization, such an administration could recast the portfolio as a failed public experiment inherited from predecessors. In that framing, selling or offloading the portfolio is not an abdication of responsibility but an act of fiscal discipline.

Importantly, this need not take the form of an explicit, congressionally authorized sale. Risk can be shifted through securitization. Revenue streams can be monetized. Servicing authority can be extended indefinitely to private firms. Data control can migrate outside public oversight. Over time, these steps amount to de facto privatization, even if the loans remain nominally federal. The infrastructure, incentives, and profits move outward, while the political blame remains with the state.

This is where earlier McKinsey & Company studies reenter the conversation. Long before the current turmoil, McKinsey analyses identified high servicing costs, fragmented contractor oversight, weak borrower segmentation, and low political returns on administrative complexity. While framed as efficiency critiques, these studies implicitly favored market-oriented restructuring. In a crisis environment, such recommendations become blueprints for divestment.

The danger of a pyrrhic defeat strategy is that it delivers a short-term political win at the cost of long-term public capacity. Selling or functionally privatizing the student loan portfolio may improve fiscal optics, but it permanently weakens democratic control over higher education finance. Borrowers, already stripped of bankruptcy protections, lose what remains of public accountability. Policymakers lose leverage over tuition inflation and institutional behavior. The federal government relinquishes a powerful counter-cyclical tool. What remains is a debt regime optimized for extraction, enforced by servicers, securitized for investors, and detached from educational outcomes.

The defeat is real. It is borne by students, families, and future generations. The victory belongs to those who acquire distressed public assets and those who benefit ideologically from shrinking the public sphere.

Pyrrhic defeat theory reminds us that collapse is not always accidental. In the case of the federal student loan portfolio, what appears to be dysfunction or incompetence may instead be strategic surrender: a willingness to let a public system deteriorate so that it can be sold off, securitized, or outsourced under the banner of necessity. If that happens, it will not be remembered as a policy error, but as a deliberate transfer of public wealth and power—made possible by decades of legal engineering that began when bankruptcy protection was taken away and ended with student debt transformed into a permanent financial asset.

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Sources

Higher Education Inquirer. “When Banks Lost Control of Student Loan Lending.” January 2025.
https://www.highereducationinquirer.org/2025/01/when-banks-lost-control-of-student-loan.html

U.S. Department of Education, Federal Student Aid. FY 2024 Annual Agency Performance Report. January 13, 2025.

U.S. Department of Education, Federal Student Aid. Federal Student Loan Portfolio Data and Statistics, various years.

Government Accountability Office. Student Loans: Key Weaknesses in Servicing and Oversight, multiple reports.

Congressional Budget Office. The Federal Student Loan Portfolio: Budgetary Costs and Policy Options.

U.S. Congress. Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 and prior amendments affecting student loan dischargeability.

Pardo, Rafael I., and Michelle R. Lacey. “The Real Student-Loan Scandal: Undue Hardship Discharge Litigation.” American Bankruptcy Law Journal.

Financial Crisis Inquiry Commission materials on asset-backed securities and consumer credit markets.

McKinsey & Company. Student Loan Servicing, Portfolio Optimization, and Risk Management Analyses, prepared for federal agencies and financial institutions, 2010s–early 2020s.

Higher Education Inquirer archives on SLABS, servicers, privatization, deregulation, and student loan policy.

Hyper-Deregulation and the College Meltdown

In March 2025, Studio Enterprise—the online program manager behind South University—published an article titled “A New Era for Higher Education: Embracing Deregulation Amid the DOE’s Transformation.” Written in anticipation of a shifting political landscape, the article framed coming deregulation as an “opportunity” for flexibility and innovation. Studio Enterprise CEO Bryan Newman presented the moment as a chance for institutions and their contractors to do more with fewer federal constraints, implying that regulatory retreat would improve student choice and institutional agility.

What was framed as a strategic easing of oversight has instead arrived as a form of collapse. By late 2025, the U.S. Department of Education has become, in functional terms, a zombie agency—still existing on paper, but stripped of its capacity to regulate, enforce, or even communicate. Consumer protection, accreditation monitoring, program review, financial oversight, and FOIA responses have slowed or stopped entirely. The agency is walking, but no longer awake.

This vacuum has emboldened not only online program managers like Studio Enterprise and giants like 2U, but also a wide array of entities that rely on federal inaction to profit from students. The University of Phoenix—long emblematic of regulatory cat-and-mouse games in the for-profit sector—now faces minimal scrutiny, continuing to recruit aggressively while the federal watchdog sleeps. Elite universities contracting with 2U continue to launch expensive online degrees and certificates whose marketing and outcomes would once have been examined more closely.

Student loan servicers and private lenders have also moved quickly to capitalize on the chaos. Companies like Aidvantage (Maximus), Nelnet, and MOHELA now operate in an environment where enforcement actions, compliance reviews, and borrower complaint investigations have slowed to a near standstill. Servicers once accused of steering borrowers into costly forbearances or mishandling IDR accounts now face fewer barriers and far less public oversight. The dismantling of the Department has also disrupted the small channels borrowers once had for correcting servicing errors or disputing inaccurate records.

Private lenders—including Sallie Mae, Navient, and a growing constellation of fintech-style student loan companies—have seized the opportunity to expand high-interest refinance and private loan products. Without active federal oversight, marketing claims, credit evaluation practices, and default-related consequences have become increasingly opaque. Borrowers with limited financial literacy or unstable incomes are again being targeted with products that resemble the subprime boom of the early 2010s, but with even fewer regulatory guardrails.

Hyper-deregulation has also destabilized the federal loan system itself. Processing backlogs have grown. Borrower defense and closed-school discharge petitions sit in limbo. Decisions are delayed, reversed, or ignored. Automated notices go out while human review has hollowed out entirely. Students struggling with servicer errors find there is no functioning authority to appeal to—not even the already stretched ombudsman’s office, which is now overwhelmed and under-directed.

Across the sector, the same pattern is visible: institutions and corporations functioning without meaningful oversight. OPMs determine academic structures that universities should control. Lead generators push deceptive marketing campaigns with impunity. Universities desperate for enrollment sign long-term revenue-sharing deals without public transparency. Servicers mismanage accounts and communications while borrowers bear the consequences. Private lenders accelerate their expansion into communities least able to withstand financial harm.

Students feel the effect first and most painfully. They face rising costs, misleading claims, aggressive recruitment, and a federal loan system that can no longer assure accuracy or fairness. The collapse of oversight is not theoretical. It manifests in missed payments, lost paperwork, incorrect balances, unresolved appeals, and ballooning debt. For many, there is now no reliable path to recourse.

Studio Enterprise saw deregulation coming. What it left unsaid is that removing federal guardrails does not produce innovation. It produces confusion, predation, and unequal power. Hyper-deregulation rewards those who operate in the shadows—OPMs, for-profit chains, high-fee servicers, and private lenders—while those seeking education and mobility carry the burden.

This moment is not an evolution. It is an abandonment. Higher education is drifting into an environment where profit extraction flourishes while public protection evaporates. Unless new sources of oversight emerge—federal, state, journalistic, or civic—the most vulnerable students will continue to pay the highest price for the disappearance of the referee.

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Sources

Studio Enterprise, A New Era for Higher Education: Embracing Deregulation Amid the DOE’s Transformation (March 2025).
HEI archives on OPMs, for-profit colleges, and regulatory capture (2010–2025).
Public reporting and advocacy analyses on student loan servicers, including Navient, MOHELA, Nelnet, Aidvantage/Maximus, and Sallie Mae (2015–2025).
FOIA request logs, non-responses, and stalled borrower relief cases documented by HEI and partner organizations (2024–2025).
Federal higher education enforcement trends, 2023–2025.

The Right-Wing Roots of EdTech

The modern EdTech industry is often portrayed as a neutral, innovative force, but its origins are deeply political. Its growth has been fueled by a fusion of neoliberal economics, right-wing techno-utopianism, patriarchy, and classism, reinforced by racialized inequality. One of the key intellectual architects of this vision was George Gilder, a conservative supply-side evangelist whose work glorified technology and markets as liberating forces. His influence helped pave the way for the “Gilder Effect”: a reshaping of education into a market where technology, finance, and ideology collide, often at the expense of marginalized students and workers.

The for-profit college boom provides the clearest demonstration of how the Gilder Effect operates. John Sperling’s University of Phoenix, later run by executives like Todd Nelson, was engineered as a credential factory, funded by federal student aid and Wall Street. Its model was then exported across the sector, including Risepoint (formerly Academic Partnerships), a company that sold universities on revenue-sharing deals for online programs. These ventures disproportionately targeted working-class women, single mothers, military veterans, and Black and Latino students. The model was not accidental—it was designed to exploit populations with the least generational wealth and the most limited alternatives. Here, patriarchy, classism, and racism intersected: students from marginalized backgrounds were marketed promises of upward mobility but instead left with debt, unstable credentials, and limited job prospects.

Clayton Christensen and Michael Horn of Harvard Business School popularized the concept of “disruption,” providing a respectable academic justification for dismantling public higher education. Their theory of disruptive innovation framed traditional universities as outdated and made way for venture-capital-backed intermediaries. Yet this rhetoric concealed a brutal truth: disruption worked not by empowering the disadvantaged but by extracting value from them, often reinforcing existing inequalities of race, gender, and class.

The rise and collapse of 2U shows how this ideology plays out. Founded in 2008, 2U promised to bring elite universities online, selling the dream of access to graduate degrees for working professionals. Its “flywheel effect” growth strategy relied on massive enrollment expansion and unsustainable spending. Despite raising billions, the company never turned a profit. Its high-profile acquisition of edX from Harvard and MIT only deepened its financial instability. When 2U filed for bankruptcy, it was not simply a corporate failure—it was a symptom of an entire system built on hype and dispossession.

2U also became notorious for its workplace practices. In 2015, it faced a pregnancy discrimination lawsuit after firing an enrollment director who disclosed her pregnancy. Women workers, especially mothers, were treated as expendable, a reflection of patriarchal corporate norms. Meanwhile, many front-line employees—disproportionately women and people of color—faced surveillance, low wages, and impossible sales quotas. Here the intersections of race, gender, and class were not incidental but central to the business model. The company extracted labor from marginalized workers while selling an educational dream to marginalized students, creating a cycle of exploitation at both ends of the pipeline.

Financialization extended these dynamics. Lenders like Sallie Mae and Navient, and servicers like Maximus, turned students into streams of revenue, with Student Loan Asset-Backed Securities (SLABS) trading debt obligations on Wall Street. Universities, including Purdue Global and University of Arizona Global, rebranded failing for-profits as “public” ventures, but their revenue-driven practices remained intact. These arrangements consistently offloaded risk onto working-class students, especially women and students of color, while enriching executives and investors.

The Gilder Effect, then, is not just about technology or efficiency. It is about reshaping higher education into a site of extraction, where the burdens of debt and labor fall hardest on those already disadvantaged by patriarchy, classism, and racism. Intersectionality reveals what the industry’s boosters obscure: EdTech has not democratized education but has deepened inequality. The failure of 2U and the persistence of predatory for-profit models are not accidents—they are the logical outcome of an ideological project rooted in conservative economics and systemic oppression.

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Sources

• EdSurge. “What a New Strategy at 2U Means for the Future of Online Higher Education.” August 5, 2022. https://www.edsurge.com/news/2022-08-05-what-a-new-strategy-at-2u-means-for-the-future-of-online-higher-education

• Newswire. “2U Faces Lawsuit for Pregnancy Discrimination.” June 2015. https://www.newswire.com/news/2u-faces-lawsuit-for-pregnancy-discrimination

• Christensen, Clayton M. and Michael B. Horn. Disrupting Class. McGraw-Hill, 2008.

• McMillan Cottom, Tressie. Lower Ed: The Troubling Rise of For-Profit Colleges in the New Economy. The New Press, 2017.

• Cellini, Stephanie Riegg. “For-Profit Higher Education: An Assessment of Costs and Benefits.” National Bureau of Economic Research, 2012.

• Rosenthal, Elisabeth. An American Sickness. Penguin, 2017.

When Banks Lost Control of the Student Loan Mess

History can be many things. It can be both informative and purposely deceptive. And from time to time, historical events need to be revisited if we seek the truth. We also find critical historical analysis essential when we think about US higher education and student loan debt from a People's perspective.

In a previous article we said Best and Best's classic The Student Loan Mess needed to be updated and reexamined. Although the book was an exceptional chronicle of the student loan industry from 1958 to 2013, it missed at least one key event, the 2008-2010 bailout of Sallie Mae and a number of banks who made questionable private loans guaranteed by the US government. This lesson is especially important if the US government decides to get out of the student loan business or reduce government oversight of student loans.

From 1965 to 2010, the federal government was a backstop for private student loans, Guaranteed Student Loans, also known as the FFEL loans. Annual volume of private loans skyrocketed, from $5B in 2001 to over $20B in 2008, when 14 percent of all undergraduates had one. A secondary market for private student loan debt (student loan asset-backed securities) also began to flourish. An industry group, America's Student Loan Providers (ASLP), provided political cover for private lenders.

In 2007, President George W. Bush signed the College Cost Reduction and Access Act of 2007 (HR 2669) which cut subsidies to lenders and increasing grants to students. But this did little to contain the growing mountain of student loan debt. A mountain of unrecoverable debt that was crushing millions of consumers as the US was facing an enormous economic crisis, the Great Recession.

In rereading The Student Loan Mess, we also discovered that these private entities had not only made questionable loans, some private lenders had also bribed university officials to become preferred lenders. How commonplace this student loan grift was has not been adequately explored.

In 2008, the Bush government began a bailout of these private lenders, the Ensuring Continued Access to Student Loans Act (ECASLA), which amounted to $110B. This event occurred largely without notice. And because a larger Great Recession was happening, the ECASLA never received much media attention.

As part of Health Care and Education Reconciliation Act of 2010, President Obama's takeover of the Guaranteed Student Loan program in 2010, did get attention. Ending the Guaranteed Student Loan program was supposed to save the US government $66B over an 11-year period. This rosy projection never materialized. The FFEL loans acquired by the U.S. Department of Education (ED) during the transition to the Direct Loan program are now part of the Direct Loan portfolio. The U.S. Department of Education (ED) acquired an additional $20.4 billion in face amount of FFEL loans from lenders during the transition from the FFEL program to the Direct Loan program.

The FFEL loans that were not acquired by the U.S. Department of Education (ED) during the transition to the Direct Loan program remained with the original private lenders. These loans continue to be serviced by the private lenders that issued them.

For-profit colleges, the engine for much of this bad debt, did get scrutiny, and from 2010 to 2023, their presence was reduced. But overpriced education and edugrift continued in many forms. And after a short respite from 2020 to 2024, the mountain of bad student loan debt continues to grow.

Related links:

A Report on the Loan Purchase Programs Created by ECASLA

Student Loan Debt Clock

America's Student Loan Providers | C-SPAN.org

Student Loan History (New America)