With nearly nine million student borrowers in default, the Treasury Department will “take responsibility for collecting” those loans, the Department of Education announced Thursday.
The move is the ED’s latest attempt to make itself obsolete as part of the Trump administration’s plan to dismantle the department. This is the 10th interagency agreement we have signed to share or implement activities with other government agencies.
But the extent of the deal with the Treasury Department is not immediately clear. Officials outlined a three-part plan to shift most non-policy obligations over the $1.7 trillion student loan portfolio to the Treasury Department “to the extent feasible and permitted by law,” but the timing of the second and third phases was not specified. Meanwhile, the Treasury has just taken over debt collection on defaulted loans.
However, the announcement raised concerns about the future of the student loan program among consumer protection advocates and Democrats in Congress. President Trump said last year that the Small Business Administration would take over the student loan program “immediately,” and ED has explored selling part of the portfolio to private companies.
But ED critics who want to see the agency shut down welcomed Thursday’s announcement. Several outside experts said figuring out what to do with the financial aid program is a key hurdle to overcome if any administration wants to eventually close the ED.
However, only Congress, which created the department by law decades ago, has the power to remove it. It didn’t do that when Republicans had a strong majority last year, and they probably won’t be too inclined to kill it if Democrats pick up seats in the midterm elections.
Washing hands
The partnership will increase the Department of Finance’s already established presence in student financial aid, while ED moves forward with exit signs and moves away from ownership of longstanding disputes over a large portfolio of student loans. The Treasury has already disbursed student loan funds, and the ED uses its tax data to verify borrowers’ incomes.
“For decades, ED has demonstrated that it is ill-equipped to manage a portfolio of this nature or complexity,” the departments wrote in a joint fact sheet accompanying the announcement.
Meanwhile, as part of an interagency agreement, Treasury said it intends to revoke a 25-year-old exemption that allows the ED’s Federal Student Aid office to service its delinquent student loan debt. The Treasury also takes over operational responsibilities for the FSA’s Default Resolution Team, which supports default borrowers and implements the Default Management and Collections System. But the ED plans to release more bonds from the Treasury in the future.
FSA chief executive not focused on loan repayments has been told Within Higher Ed that they and their colleagues received little advance notice of the interagency agreement before a briefing held 10 minutes before the announcement went public. The official added that they would be surprised if the ED hands over other financial aid jobs anytime soon.
Rachel Gittleman, president of the American Federation of Government Employees Local 252, the union that represents ED workers, condemned this in a statement.
“The Trump Administration continues to illegally dismantle the Department of Education by moving programs and offices to other federal agencies despite a clear warning from Congress that Education Secretary Linda McMahon has no authority,” Gittleman said.
Aissa Canchola Bañez, director of policy for the nonprofit organization Protect Borrowers, accused McMahon of trying to “wash his hands of the unprecedented default crisis and make his policies worse.”
“Amidst a growing crisis of affordability where American families are already struggling, this risks pushing millions of borrowers further into financial hardship,” Bañez said in a statement. “Instead of providing relief to millions of delinquent borrowers, the department is moving a portfolio of high-risk borrowers to an institution with little knowledge of the rights and benefits borrowers receive under the Higher Education Act.”
But the conservative Heritage Foundation, which opposes the existence of the ED, has praised the move and said its impact will be far-reaching than is currently apparent.
“The new plan will speed up the process of closing the Department of Education by moving all student loan collection and other important functions that the agency can share under the law to the Department of Finance,” the tank said in a statement. “This new partnership is the most significant effort to reform student loans since the Higher Education Act of 1965.”
Earlier this year, the ED suspended its plans to garnish the wages of defaulting borrowers, citing the need to make other “major changes to student loan repayment.” Under Trump’s second administration, it has also pushed back on plans to restart unscheduled debt collection.
Using Treasury Technology
Melanie Storey, president of the National Association of Student Financial Aid Administrators, said the Treasury’s crackdown on defaulting borrowers is nothing new, for the most part.
Although FSA staff within the Automatic Resolution Group and the Automatic Management and Collection System were the points where borrowers were contacted for advice and next steps, it was always the Treasury Department that collected automatic payments for defaulted debts under the authority of the Debt Collection Improvement Act, explained Storey.
“Withholding tax refunds and other government benefits can only be done by the Treasury,” he said. “So, this is not really a revolution.”
But where things can get complicated, he added, is if the Department of Education takes other steps to transfer other parts of the $1.7 billion portfolio, as stated throughout the ED’s press release and fact sheet.
“The devil is in the details” as we asked “what happens next,” added Storey, “and that’s not clear.”
A senior ED official told reporters Thursday that “if you’re a borrower and you pay today, you shouldn’t see a change. This should be seamless,” adding that borrowers should see “better customer service.”
In a press conference Thursday, McMahon said, “With the Federal student aid portfolio increasing to nearly $1.7 trillion and nearly a quarter of student loan defaulters, the American people know that the Department of Education has failed to effectively manage and deliver these critical programs.” He added that “by leveraging the Treasury’s world-renowned expertise in finance and economic policy, we are confident that America’s students, borrowers and taxpayers will ultimately have programs that work.”
Departments say the plan is for the Treasury to take on more financial aid responsibilities, beyond the collection of unpaid debts—in the future. A senior ED official told reporters Thursday that “this is a multi-tiered collaboration,” but did not provide a timeline for the rollout.
“The second phase will be taking responsibility for working on Federal Student Aid debts that are not at fault to the extent legal and possible, including paying those debts, and that third phase will be the review of the general administrative functions of the FSA regarding student eligibility and overseeing the eligibility of the institution and the enforcement of the official programs of student participation,” said the department of Federal Aid.
The department’s fact sheet noted that the Department of Finance may eventually help administer the Free Application for Federal Student Aid, the key forms students must fill out to open federal and non-federal college funding sources.
But like other interagency agreements, the ED will retain greater control. Both departments said “ED, through both the Office of Postsecondary Education and FSA, will retain all statutory responsibilities including policy development.”
