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President Trump’s administration is taking a major step toward reshaping how the federal government manages student debt by announcing plans to transfer core credit management functions from the U.S. Department of Education to the U.S. Treasury Department. The move starts with defaulted borrowers and could expand to broader operational support for the nation’s $1.7 trillion student loan portfolio.
Interagency agreement introduces phased transfer
The Departments of Education and Treasury have reached an interagency agreement under which Treasury will assume responsibility for collecting defaulted federal student loan debt, officials said Thursday. The partnership will be implemented in phases, with future steps including operational support for non-defaulted loans “to the extent possible and permitted by law.”
The agreement marks the first formal shift in responsibilities as the administration pursues its broader goal of dismantling the Department of Education and redistributing its functions among federal agencies.
The Department of Education estimates that the federal student loan portfolio is currently approximately $1.7 trillion. Less than 40% of borrowers are currently in repayment, compared to almost 25%; Approximately $425 billion is believed to be in default.
Officials say the scale of the portfolio and high default rates underscore the need for a new approach to managing debt and returning borrowers to active repayment status.
Trump’s election campaign promise to dismantle the Department of Education
During the 2024 campaign, President Trump promised to dismantle the Department of Education as part of a broader conservative effort to reduce the federal government’s role in education and cede more control to the states.
Although formally eliminating the department would require an act of Congress, the administration has already begun redistributing functions. Late last year, the agency announced partnerships with the Departments of Labor, State, Interior and Health and Human Services to share or delegate responsibilities.
Linda McMahon defends Treasury takeover of debt collection
Education Secretary Linda McMahon sends letter to 43 million Americans with student loan debt; about 9 million of them are in default; He stated that the Treasury would undertake debt collection.
“For too long, Americans have shouldered the consequences of poor leadership and persistent mismanagement of our federal student aid portfolio. Today’s actions reclaim honesty and accountability for you, the American people,” McMahon writes in his letter.
He added that the Department for Education had “sadly proven unable to collect debts owed to taxpayers”.
The Treasury Secretary said the change reflected a push for stronger fiscal discipline
“Under President Trump’s leadership, we are making the first serious effort to clean up a $1.7 trillion portfolio that has been mismanaged for years,” Bessent said. “Treasury has the unique experience, operational capacity and financial expertise to bring long-overdue fiscal discipline to the program and better manage taxpayer money.”
Because the Treasury Department includes the Internal Revenue Service, officials say the agency has the tools to collect past-due debts; including the ability to garnish up to 15% of a borrower’s paycheck.
At the same time, borrowers can enroll in income-driven repayment plans that cap monthly payments at as low as 10% of discretionary income, providing a potential path back to good standing.
The FAFSA process and available reimbursement channels remain unchanged
McMahon emphasized that the Free Application for Federal Student Aid (FAFSA) process will remain unchanged despite the administrative shift. Borrowers who are currently making payments should continue to use their current loan servicer.
“Treasury will assume operational responsibility for collecting defaulted student loan debt and provide support to help borrowers repay,” the letter states.
Prior to the agreement, the Department of Education’s Default Resolution Group managed collections for borrowers who had missed payments for at least 270 days; threshold that usually triggers default.
Under the new arrangement, the Treasury will take on these responsibilities before potentially expanding its role into broader credit management operations.
Reimbursement overhaul tied to broader policy changes
The timing of the transfer coincides with preparations to implement sweeping reimbursement reforms included in Trump’s latest spending legislation. The administration said the interagency partnership presented a “promising opportunity to return borrowers to repayment” as new plans and debt ceilings come into effect.
Officials had previously explored shifting credit enforcement to other agencies, including the U.S. Small Business Administration, before ultimately settling on the Treasury.
Critics warn of uncertainty for borrowers
Consumer advocates have expressed concerns about the transition. Critics say shifting student loan administration to the Treasury “creates a new set of hurdles and uncertainties, and no plan exists to resolve them.”
Universities also face scrutiny over rising debt levels
In his letter, McMahon criticized higher education institutions for relying heavily on federally backed loans and argued that the practice helps fuel tuition increases.
“As universities increased tuition and treated federally backed loans as a blank check written by American taxpayers, Americans took on crippling student debt and millions of people began to flounder financially,” he wrote. “In fact, 23% of undergraduate programs and 43% of graduate programs leave students worse off than if they had not enrolled.”
Once the phase-in begins, millions of borrowers will be watching closely to see whether this shift improves their repayment outcomes; or adds new complexity to an already strained system.
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John Dealbreuin came to the United States from a third world country without knowing anyone and with only $1,000; Guided by an immigrant dream. He reached his retirement number in 12 years.
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