The Trump administration announced last month that the Education Department would be transferring operational control of federal student loans to the Department of Treasury, a potentially massive and unprecedented change for the student loan system. Top administration officials billed the efforts as their latest step to dismantle the Education Department. But critical questions remain unanswered, even as the administration appears to be taking new steps to begin implementing the transition as soon as this summer.
Secretary of Education Linda McMahon characterized the initiative as an “intentional and historic step toward breaking up the Federal education bureaucracy and dramatically improving the administration of Federal student aid programs that millions of American students, families, and borrowers rely on to access higher education,” in an announcement in March.
The transfer of operational control of federal student loans will be accomplished via an interagency agreement between the Education and Treasury departments. That agreement outlines the details of the transition, which will occur in three distinct phases. But many elements of the proposed transfer, including the timing and its legality, remain murky. Here’s where things stand.
Defaulted Federal Student Loans To Be Transferred As Soon As This Summer
The first phase of the transfer of the federal student loan system from the Education Department to Treasury will focus on defaulted federal student loans. Once it has operational control, the Treasury Department is expected to outsource collections efforts against defaulted student loan borrowers to private, for-profit debt collection agencies.
“Under the agreement, Treasury will assume operational responsibility for collecting on defaulted federal student loan debt, leveraging private default resolution agencies to help defaulted borrowers enroll in rehabilitation or otherwise return to good standing,” says a fact sheet explaining the interagency agreement. “Treasury will also assume operational responsibilities for FSA’s Default Resolution Group, which provides direct support for those borrowers who have defaulted on their student loans and operates the Default Management and Collections System (DMCS).”
The first batch of defaulted federal student loans could be transferred over to Treasury as soon as this summer, according to recent reporting by Politico. Around 500,000 defaulted federal student loan accounts are expected to be transitioned to Treasury in July, according to the reporting, although some administration officials have apparently disputed the figures. Once the loans have been transferred, Treasury (or its contracted private debt collection agencies) will begin collections efforts against borrowers in default on their federal student loans, including sending letters and making phone calls. Eventually, these efforts may expand to include involuntary collections activities such as garnishing wages, seizing tax refunds, and offsetting federal benefits, tactics that haven’t been employed against borrowers in more than six years.
Next Phases Will Involve Transferring Student Loans In Good Standing
After defaulted federal student loans have been transferred to Treasury, the Education Department will begin moving operational management of student loan servicing over to Treasury, as well. This would include all federal student loans that are in good standing and would cover everything from loan repayment to processing deferments, forbearances, and student loan forgiveness.
“Federal student loan servicers are the primary contact point for borrowers who have Federal Direct Loans and assist student and parent borrowers who are in repayment on their Federal Direct Loans by handling general billing and payment processes, answering questions, and working with borrowers to identify and enroll in the repayment plan that best meets their unique and individual financial situations,” reads the section of the interagency agreement outlining the “Second Phase” of the transition of student loans from the Education Department to Treasury. “The current loan servicers under contract with Education through its Unified Servicing and Data Solution (USDS) contract are agents of the federal government and perform all services required under their agreements such as effectively communicating with borrowers, including the operation of call-centers capable of handling significant volume; collecting payments, processing refunds, and enrolling borrowers in repayment plans; and reporting on-time and delinquent payments to the credit reporting agencies.”
However, neither the department’s fact sheet nor the interagency agreement itself provides any details on the exact timing of the transition of federal student loan servicing operations. And it is unclear if the transfer of defaulted federal student loans must be completed before the loan servicing transition can begin.
In the third phase of the transfer of operational management, the Treasury Department will resume responsibility for administering “all federal financial aid programs authorized under Title IV of the HEA, including Pell Grants, the Federal Direct Loan Program, the Federal Family Education Loan Program, the Perkins Loan Program, and campus-based aid programs such as Federal Work Study and the Supplemental Educational Opportunity Grant Program.”
Lawmakers Question Legality Of Transitioning Student Loans From The Education Department
The Trump administration maintains that the interagency agreement between the Education and Treasury departments to transfer student loan operations is legally authorized under existing federal law.
“The partnership will be implemented under a commonly utilized interagency agreement framework authorized by the Economy Act,” says the fact sheet. “Treasury will work to provide operational support over non-defaulted federal student loan debt, to the extent practicable and permitted by law, while also seeking opportunities to provide operational support to FSA’s other functions, including the administration of the FAFSA form and more. ED, through both the Office of Postsecondary Education and FSA, will maintain all statutory responsibilities including policy development.”
But some Democratic lawmakers are questioning the legality of the arrangement, arguing that Congress set up student loan programs to be specifically administered by the Department of Education, not by the Treasury Department.
“The most recent IAA entails offloading ED’s fundamental responsibilities to manage student loans and federal student aid to Treasury, without Congressional authorization,” said Senator Elizabeth Warren (D-Mass.) in a letter to Education Secretary Linda McMahon and Treasury Secretary Scott Bessent earlier this month. Democratic senators Ron Wyden (OR), Bernie Sanders (VT), Patty Murray (WA), and Tammy Baldwin (WI) also signed onto the letter.
Calling the interagency agreement an “illegal scheme” that would ultimately harm student loan borrowers, the senators argued that, “Federal law is clear: there is established within ED a PerformanceBased Organization, FSA, and FSA is ‘responsible for the administration of Federal student financial assistance programs,’ which the Higher Education Act unambiguously says includes ‘administrative, accounting, and financial management functions,’ the ‘collection, processing, and transmission of data to students and institutions,’ and ‘providing all customer service, training, and technical support,’ among other activities.”
But so far, the Trump administration appears to be moving full speed ahead to transfer operational control of federal student loans from the Education Department to the Department of Treasury. While critical details about the transition remain unclear, it appears that this summer may serve as a critical test once hundreds of thousands of defaulted federal student loan borrowers face debt collection efforts that will ultimately be managed by Treasury. Given the other significant student loan changes happening at around the same time, time will tell whether borrowers’ ability to repay their loans, apply for loan forgiveness and other relief programs, and get their loans out of default will be impacted.
Read the full article here