The fate of the federal student-loan portfolio is moving to the Treasury Department. That could raise some challenges for borrowers.
The Department of Education announced in March that it would be transferring millions of student-loan borrowers’ accounts to the Treasury, starting with the accounts of defaulted borrowers. The administration made clear the move is part of its broader goal of dismantling the Department of Education.
This isn’t the Treasury’s first foray into federal student-loan management. In 2015, the Obama administration wanted to understand why defaulted borrowers struggled to repay, and how federal agencies could help them. So it conducted a pilot to determine whether the Treasury could effectively collect on defaulted loans. The pilot proved unsuccessful — suggesting similar challenges lie ahead for the Trump administration’s effort.
The changes to the student-loan program come at a critical time for defaulted borrowers. Defaults, which typically occur after 270 days of missed payments on federal student loans, are at a record high, with about 9 million borrowers in default.
The Obama Treasury’s student-loan challenges
During the 2015 pilot, the Treasury took over about $80 million worth of defaulted student-loan accounts. The experiment also maintained a control group of private collectors with roughly the same size portfolio.
Sarah Bloom Raskin, who served as deputy treasury secretary at the time, told Business Insider that there were “operational challenges” with the private debt collection agencies, including difficulties reaching borrowers and collecting the correct payment amounts, and that the pilot was intended to investigate those issues.
One year in, the Treasury had collected 4.1% of its borrowers’ loans, compared with 5.5% in the control group. In dollar terms, the Treasury recovered 0.38% of its $80 million defaulted loan portfolio, compared with a 3.4% recovery rate for the private collector portfolio.
“[Collecting defaulted loans] is not an operational no-brainer,” Raskin said. “It’s operationally quite challenging, and you need the right people there in your career service who can handle this.”
The 2015 pilot report highlighted several reasons for the Treasury’s lower recovery rate. It said that the agency “proceeded relatively slowly” through the collections cycle to boost voluntary payments from borrowers, and that it called borrowers less frequently than private collectors did.
The report also said that borrowers were confused about why a third party — either the Treasury or a private collector — was contacting them instead of the Department of Education itself.
Having a clear point of contact is crucial for borrowers, said Arne Duncan, the education secretary under former President Barack Obama. During his tenure, he tried to establish what he called “one state desk” — a clear point of contact for anyone to call about a specific issue.
“Now, you might have to call five or six or seven different agencies,” Duncan said. “It makes no sense educationally or from a customer service standpoint.”
Ultimately, the Obama administration did not move forward with the pilot.
A complicated road for defaulted student-loan borrowers
In a March press release, Education Secretary Linda McMahon said her department had “failed to effectively manage and deliver these critical programs.” A fact sheet said that with the Treasury already disbursing federal student aid funds, it was a logical next step. Treasury Sec. Scott Bessent said in a statement that the agency has “the unique experience, the operational capability, and the financial expertise to bring long overdue financial discipline to the program and be better stewards of taxpayer dollars.”
A blog post by Preston Cooper, a senior fellow at the conservative think tank the American Enterprise Institute, said that the Treasury has access to borrowers’ tax information and could use that data to better understand their financial situations and the factors that influence nonpayment.
Raskin said the process could be more complicated.
“It’s one thing to disburse it. It’s another thing to collect,” Raskin said. “Those are two separate operational regimes.”
In January, the Department of Education paused involuntary collections on defaulted loans, meaning that borrowers would not face wage garnishment or tax refund seizures.
Sarah Sattelmeyer, education project director at the left-leaning think tank New America, told Business Insider that once the pause lifts, it’s important that borrowers receive the information and guidance they need to return to good standing, and that the transfer to Treasury could jeopardize those efforts.
“Having systems that are spread across multiple agencies really puts the entire system at risk and is going to make it a lot harder, not only to communicate with borrowers, but also to make sure that we are moving toward a more streamlined system,” Sattelmeyer said.
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