Loan Portfolio Transfer
The Education Department is transferring management of the $1.7 trillion federal student loan portfolio to the Treasury Department. This move represents the most significant step to date in the Trump administration's efforts to reduce the Education Department's scope. The department announced the shift Thursday.
Dismantling the Department
The Trump administration is working to reduce the Education Department's scope. Only Congress has the authority to close the department.
Defaulted Loans
The Treasury Department will initially take over the management of defaulted student loans. These loans total approximately $180 billion, representing 11% of the government's total student loan portfolio. Borrowers are typically considered in default if they haven't made a payment in more than 270 days.
Future Loan Management
The agreement outlines a plan for Treasury to eventually assume operational responsibility for all student loans "to the extent practicable." Education Secretary Linda McMahon called Treasury a "natural" place for student loans at her Senate confirmation hearing. However, Trump later said they would be overseen by the Small Business Administration. The 17-page agreement marks what McMahon calls "an intentional and historic step toward breaking up the Federal education bureaucracy."
Borrower Impact
Borrowers do not need to take any action as the change is implemented. They will continue to work with their existing loan servicer and repay their loans in the same manner.
Potential Legal Challenges
The agreement is likely to face legal challenges. Some opponents argue that federal law mandates the Education Department to oversee student loans. The Trump administration believes it has found a workaround by framing the transfer as a partnership, with some components, including the policies underpinning student loans, remaining at the Education Department.
Concerns about Expertise
Student loans are considered a particularly complex form of debt. A 2015 pilot program saw the Treasury Department attempt to collect payments from a sample of thousands of borrowers in default, but its success rate was lower than that of private collection agencies contracted by the Education Department.
Troubled Loan Payments
About 12 million Americans are behind on federal student loan payments in some way, including approximately 9.2 million in formal default (270+ days without payment). The industry is bracing for a potentially historic surge in defaults as pandemic-era protections end. Going into default can bring a heavy hit to credit scores, and the government can withhold pay and Social Security benefits.
