The US Treasury Department is set to take over management of defaulted student loans from the Education Department, marking the first phase of a plan to ultimately transfer the entire federal student loan portfolio. The agreement, announced on Thursday, covers approximately $180 billion in defaulted loans, representing 11% of the government's $1.7 trillion student loan portfolio.
Under the three-phase plan, Treasury will initially handle debt collection on defaulted loans. A second phase, with no set timeframe, aims to give Treasury operational responsibility for non-defaulted loans 'to the extent practicable'. The administration stated that borrowers do not need to take any action and will continue to interact with the same loan servicers.
The move is part of President Donald Trump's efforts to dismantle the Education Department, which he has criticised as being overrun by liberal thinking. While only Congress can formally close the agency, the administration is using inter-government agreements to relocate its functions. Education Secretary Linda McMahon described Treasury as a 'natural' home for student loans, though Trump later suggested the Small Business Administration could oversee them.
Critics question whether Treasury has the technical expertise to manage such complex debt. A 2015 pilot programme saw Treasury collect payments from defaulted borrowers at a lower success rate than private collection agencies used by the Education Department. Currently, about 9.2 million Americans are in default on student loans, with default defined as missing payments for more than 270 days.
The realignment comes at a precarious time, with around 12 million Americans behind on federal student loan payments. Pandemic-era protections have ended, and the industry anticipates a potential surge in defaults. Earlier this year, Trump officials postponed plans to restart involuntary collections on defaulted loans, which could have affected millions of borrowers.
