The management of millions of federal student loan accounts is being transferred from the Department of Education to the Treasury Department, starting with those of defaulted borrowers. The move, announced in March, is part of the current administration's broader goal of dismantling the Education Department. This shift occurs as student loan defaults have reached a record high, with approximately 9 million borrowers currently in default status.
However, a similar initiative undertaken in 2015 during the Obama administration yielded poor results, raising questions about the Treasury's capacity for effective loan collection. A pilot programme that year saw the Treasury take over around $80 million in defaulted loans to test its collection efficacy against private agencies.
Past Pilot Programme Shows Operational Challenges
The 2015 experiment proved unsuccessful. After one year, the Treasury had collected payments from just 4.1% of its assigned borrowers, compared to 5.5% for the private collector control group. In monetary terms, the Treasury recovered only 0.38% of the $80 million portfolio, starkly lower than the 3.4% recovery rate achieved by private firms.
Sarah Bloom Raskin, Deputy Treasury Secretary at the time, stated the pilot revealed significant "operational challenges." She emphasised that "collecting defaulted loans is not an operational no-brainer. It's operationally quite challenging, and you need the right people there in your career service who can handle this."
An official report on the pilot cited several reasons for the Treasury's lower performance, including a slower approach to the collections cycle aimed at encouraging voluntary payments and less frequent contact with borrowers compared to private collectors.
Confusion for Borrowers and Systemic Risks
The report also identified borrower confusion as a key issue, with individuals unsure why the Treasury or a private agency was contacting them instead of the Department of Education. Arne Duncan, Education Secretary under President Obama, highlighted the importance of a single point of contact, a principle he tried to establish with a "one state desk" policy.
"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." The Obama administration ultimately did not proceed with transferring loan management to the Treasury following the pilot.
Administration Confident in Treasury's Capabilities
In the March announcement, Education Secretary Linda McMahon stated her department had "failed to effectively manage and deliver these critical programs." A supporting fact sheet argued the Treasury, which already disburses federal student aid, was the logical entity to manage the portfolio.
Treasury Secretary Scott Bessent said in a statement the agency possesses "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." Some analysts, like Preston Cooper of the American Enterprise Institute, suggest the Treasury's access to tax data could improve understanding of borrowers' financial situations.
Uncertain Future for Defaulted Borrowers
The transfer comes at a critical juncture. In January, the Department of Education paused involuntary collections—such as wage garnishment and tax refund seizures—on defaulted loans. Sarah Sattelmeyer of New America warns that the shift to Treasury could complicate efforts to help borrowers return to good standing once collections resume.
"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 told Business Insider.