The U.S. Education Department is handing off management of a portion of the federal student loan portfolio to the Treasury Department, in what the administration described as a step toward eventually moving the entire function away from the education agency. Under an agreement announced Thursday, Treasury will take over management of federal student loans whose borrowers are in default—defined in the report as borrowers being months behind on payments. The loans totaled about $180 billion, or 11% of the government’s $1.7 trillion student loan portfolio, according to the Associated Press report.
The agreement describes a phased transfer. In the first phase, Treasury will manage defaulted loans. In a later phase without a stated timeline, Treasury is to “assume operational responsibility” for non-defaulted loans “to the extent practicable,” the report said. The Education Department, created more than 40 years ago, has overseen federal student loans during that period, and the transfer is the latest development in the administration’s broader effort to dismantle the agency.
Administration officials framed the move as a response to the Education Department’s ability to administer the student loan portfolio. The officials said the department is “ill-equipped” to manage the large loan portfolio and argued that the Biden administration’s focus on canceling student loans left fewer borrowers making payments and more entering default. The report said officials pointed to data showing fewer than half of borrowers are making payments, with almost a quarter in default.
The plan also says borrowers do not need to take action during the transition. The administration told borrowers they will continue to work with the same loan servicer and repay their loans the same way as the change is implemented. The report said that the Education Department’s role in administering grants and loans for education funding remains a major part of its work, but the student loan portfolio transfer represents an additional shift in how federal education obligations are administered.
Education Secretary Linda McMahon said the agreement is intended to break up the federal education bureaucracy. In a statement cited by the report, she said the agreement “marks an intentional and historic step toward breaking up the Federal education bureaucracy and dramatically improving the administration of Federal student aid programs.” The Associated Press report described the student-loan transfer as the biggest step so far in closing the department, ordered by President Donald Trump nearly a year earlier, while noting that only Congress has authority to close it.
Opponents said the agreement is likely to face legal challenges. The report said some critics point to federal law that requires student loans to be overseen by the Education Department. Trump officials, the report said, believe they have found a workaround by describing parts of the plan as a partnership, with some components—including the policies underpinning student loans—remaining at the Education Department.
Student loan advocates also criticized the shift, saying it could add to confusion for borrowers as the administration overhauls student loan rules and programs. Kyra Taylor, an attorney at the National Consumer Law Center, said the Education Department has issued what she called a “dizzying series of rule changes” that make it harder for borrowers to understand their options. She warned that errors in loan collection would have “devastating effects on families,” the report said.
The report also put the deal in the context of the administration’s longer-running approach to student debt. It said Treasury had been discussed as an option, but some had questioned whether Treasury has the technical expertise needed for a complex portfolio. The report cited a 2015 pilot in which Treasury tried to collect payments from a sample of thousands of borrowers in default, with a lower success rate than private collection agencies contracted by the Education Department. The Associated Press report also noted that federal student loans are typically considered in default if borrowers have not made a payment in more than 270 days, and it said 9.2 million Americans are in default, based on Education Department data released this month.