Treasury’s Deal to Take on Student Debt Collection Has the Education World Confused

As the Treasury Department gradually takes on much of the student loan collection typically done by the Department of Education, a major change will be the knowledge of education policy that agency staff have.

The Trump administration announced last month that the Treasury would take on the Department of Education’s student loan debt portfolio of nearly $1.7 trillion. Financial aid experts say that move risks losing the expertise that Education Department staff bring to the collection process.

“A large-scale disassembling of the department which, this is part of that larger context, right, makes that a lot harder, and it makes it harder to serve students. It makes it harder to give them a streamlined service, and it makes the system more piecemeal and confusing when it is spread out across all different agencies,” said Sarah Sattelmeyer, a project director for the public policy think tank New America.

The move to transfer the student loan portfolio would be the most sizable interagency agreement announced by the Department of Education under the second Trump administration. And the Treasury will take on a system that is already struggling, with almost 25% of borrowers — around 9 million people — in default on their loans.

“You can have a student loan program that, in essence, is growing and is being administered by a group of people whose only goal is money in, money out, rather than a larger goal of improving higher education,” Julie Margetta Morgan, the president of The Century Foundation and former deputy under secretary at the Department of Education in the Biden administration, told NOTUS.

For borrowers in default, Morgan said this change could be particularly difficult because this group already faces the most severe financial consequences.

“[The Treasury is] truly about collecting money for federal coffers, not about what kind of world do we want to build, what kind of economy do we want to have?” Margetta Morgan continued. “And so I think it’s just a real loss to make this change.”

Many experts are confused about how the two departments will carry out this interagency agreement. Several uncertainties still remain regarding when or how the student loan portfolio will begin to shift.

“I would say it immediately raises lots of questions about how exactly this will happen. You know, the devil is always in the details, and there are lots of moving pieces to this,” Karen McCarthy, the vice president of public policy and federal relations at the National Association of Student Financial Aid Administrators, told NOTUS.

The change is expected to happen in three phases, according to the interagency agreement. The first will push borrowers in default on their loans and the accompanying default resolution group, which works to track defaulted borrowers and enforce repayment, to the Treasury for collections. The Treasury already handles some aspects of the default portfolio when borrowers get to the point of involuntary collections such as wage garnishment.

The second and third phases would be far more wide-reaching. The second would give Treasury oversight over non-defaulted debt, while the third would move the administration of major programs including the Pell Grant, federal work study and the Free Application for Federal Student Aid to the Treasury.

These final two phases could face significant backlash, a higher education expert told NOTUS.

In Congress, Democratic senators are calling this arrangement illegal. The Department of Education is required by law to maintain its statutory responsibilities, and many Democrats see these agreements as a way to sidestep the process of getting congressional approval to dismantle the agency.

“This latest illegal scheme from the Trump Administration threatens to trap student loan borrowers, students, and families in chaos and bureaucracy, all while American taxpayers are left to foot the bill for Treasury to administer programs that ED can and should administer itself,” Sens. Elizabeth Warren, Bernie Sanders, Ron Wyden, Patty Murray and Tammy Baldwin wrote in a joint statement following the announcement by the Department of Education and the Treasury.

A Department of Education spokesperson argued to NOTUS in a statement that the partnership would lower costs.

“With the student loan portfolio approaching $1.7 trillion and defaults nearing 25 percent, now is the time for a hard reset in how the federal government provides and services student loans,” Ellen Keast, press secretary for higher education at the agency, said in the statement. “We are confident that our partnership with the Treasury, an experienced and proven fiduciary, will strengthen program administration and better serve American students, borrowers, and taxpayers.”

Functionally, many opponents of the agreement between the Education Department and Treasury are focused on a lack of clarity on how this shuffling would help meet the administration’s goals of getting rid of bureaucracy.

“I do think that by separating out the implementation function from the policy-making function, that decreases coordination and alignment,” Sattelmeyer told NOTUS.

Some experts said they’re confident that the administration of the loans will remain the same, as agreements between borrowers and vendors are legally defined.

“I actually don’t expect things to change from a borrower-perspective very much,” said Betsy Mayotte, the president of the Institute of Student Loan Advisors, a nonprofit that advises borrowers. “The terms and conditions of federal student loans are largely written into federal law, and Treasury doesn’t have the authority to change that. But where there may be some gray areas, I don’t know if they would adopt the same policies that they have for IRS debt that they would for student loan debt.”