The Education Department said Thursday that the Treasury Department will assume responsibility for collecting on defaulted student loans, the first of three phases to spin off key functions of the office of Federal Student Aid.
The move marks the first significant effort by the Trump administration to chip away at the student aid office, one of the core functions of the Education Department, as it tries to dismantle the agency. The change took effect immediately.
Democratic lawmakers and student advocates fear the move will create further confusion for borrowers at a time when the student loan landscape is rapidly changing. They also worry that defaulted borrowers, who need the most support, will be forced to navigate a new process without any of the Education Department’s expertise.
The Trump administration argues that Treasury, which disburses funds for federal student loans and seizes tax refunds for past-due debts, is best suited to manage the collection of defaulted student loans. And partnering with the agency could go a long way to improving the collections system at a time when nearly 25 percent of federal student loan borrowers are in default.
“Americans know that the Department of Education has failed to effectively manage and deliver these critical programs,” Education Secretary Linda McMahon said Thursday in a statement. “By leveraging Treasury’s world-renowned expertise in finance and economic policy, we are confident that American students, borrowers, and taxpayers will finally have functioning programs after decades of mismanagement.”
McMahon wants to shake up the department’s role in managing the $1.7 trillion student loan portfolio, arguing that the agency was never designed to run the equivalent of the fifth-largest commercial bank in the country.
The Education Department has signed an interagency agreement that immediately makes Treasury responsible for Federal Student Aid’s Default Resolution Group, which operates a collection platform that serves nearly 6 million borrowers who owe more than $120 billion. In subsequent phases, Treasury will also assist in the collection of student loans that are in good standing and in the administration of the federal financial aid form. There is no timeline in the agreement for these phases.
By maintaining a role in the arrangement, the Education Department is carefully sidestepping federal law that requires many student aid programs to be housed at the agency.
The Trump administration has routinely used interagency agreements to outsource functions of the department since President Donald Trump signed an executive order last year seeking its elimination. The order directed McMahon to work with Congress to dismantle the agency, but lawmakers have not taken Trump’s request under serious consideration, because legislation would need to clear the Senate, where Democrats are unlikely to offer support.
The department is contending with millions of borrowers falling behind on their student loan payments and millions of others trying to navigate a repayment system thrown into disarray by several lawsuits to end a Biden-era repayment plan. McMahon and her supporters largely blame the Biden administration for the state of the student loan program, but many higher education experts say the problems run deep and span many administrations.
In the coming months, student loan repayment will undergo a significant transformation as the Education Department implements a new repayment plan and rehabilitation opportunity for defaulted borrowers, features of the One Big Beautiful Bill that Trump signed into law in July. The Education Department said the arrangement with Treasury will support those efforts, but student advocates worry the agreement will only sow more confusion.
“This isn’t efficiency — Secretary McMahon is creating confusion, eroding public trust, and harming students and families,” said Rachel Gittleman, president of American Federation of Government Employees Local 252, which represents Education Department workers.
“This is an insult to the nearly 43 million Americans with federal student loan debt and to the taxpayers who depend on federal oversight to prevent waste, fraud and abuse,” Gittleman said.
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