The student-loan shake-up continues.
On Thursday, the Department of Education announced its plans to transfer the $1.7 trillion federal student-loan portfolio to the Treasury Department. It’s a major step toward accomplishing President Donald Trump’s broader goal of dismantling the Department of Education and comes at a critical time for millions of borrowers facing changes to repayment.
The agreement between Treasury and the Education Department said the transition will occur in multiple phases and begin with the transfer of nearly 9 million defaulted student-loan borrowers’ accounts to Treasury. The agency will be responsible for collecting on defaulted debt and advising borrowers on returning to good standing, a responsibility that was previously held by Federal Student Aid’s debt resolution office.
Education Secretary Linda McMahon blamed the Biden administration for repayment confusion and errors in a letter to borrowers alongside the announcement, saying that the Department of Education has “proven woefully unable to collect on debt owed to taxpayers.”
“The status quo has failed our students and mired our nation in financial stalemate,” McMahon wrote. “It’s time for an entity with deep experience in finance and banking to support this major fiscal responsibility.”
What comes next for student-loan borrowers
The Treasury will not assume the entire federal student-loan portfolio at once. The first phase for the transition will affect only defaulted student-loan borrowers, and in the later phases, the Treasury will assume responsibility over other borrowers’ accounts.
McMahon said in her letter to borrowers that all borrowers should continue making their payments through their federal servicer and will continue to receive communications from Federal Student Aid about upcoming repayment changes, including enrolling in new repayment plans.
“Treasury will assume operational responsibility for collecting on defaulted student loan debt and provide support to help return borrowers to repayment,” McMahon said. She added that, as the transition is carried out, borrowers can expect to see improved student-loan servicing and higher-quality customer service.
Borrower advocates are skeptical. Aissa Canchola Bañez, policy director at advocacy group Protect Borrowers, said in a statement that the move “risks driving millions of borrowers further into financial hardship.”
“Instead of providing relief to the millions of defaulted borrowers who have fallen behind, the Department is moving a portfolio of our most vulnerable borrowers to an agency with little to no expertise in the rights and benefits afforded to borrowers under the Higher Education Act,” Bañez said.
The Department of Education announced in January that it was pausing collections on defaulted student loans, including wage garnishment and tax refund seizures, to give borrowers more time to make payment arrangements. It’s unclear when that pause will lift, and Bañez and other advocates called for it to remain in place as the transition proceeds.
At the same time, millions more borrowers will soon have to enroll in a new repayment plan due to the elimination of Biden’s SAVE plan, as well as Trump’s repayment overhaul in his “big beautiful” spending legislation. McMahon said that Treasury’s involvement will streamline those repayment changes, but some Democratic lawmakers are concerned it will put borrowers at risk.
“Despite all this administration’s talk about creating efficiency, the fact is these agreements simply create pointless new red tape—while threatening basic services and support that students depend on every day,” Sen. Patty Murray, Vice Chair of the Senate Appropriations Committee, said in a statement.
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