Treasury’s First Bite Of A $1.7t Student Loan Headache

The Trump administration is putting the job of handling millions of overdue student loans into the hands of the Treasury Department — a massive responsibility that agency officials have resisted for years.

Education Department officials recently announced plans to gradually move the nearly $1.7 trillion student loan portfolio to the Treasury Department, a major escalation in President Donald Trump’s efforts to shut down the education agency.

Student loans in default will be the first piece of the portfolio to be moved over, with the Education Department arguing that Treasury is best suited to handle them because of its history of collecting other federal debts. But current and former federal student aid officials say Treasury has more experience with forced-collection tactics, like seizing wages to repay loans, and is not well-versed in the more flexible options available to student loan borrowers to get out of debt and repair their credit.

That shift could eventually create new financial pain for the 10 million borrowers already in default, which can tank a person’s credit score at a time when the price of gasoline, housing, food and other essentials continues to rise.

It’s also a responsibility that Treasury officials have tried to swat away since the first Trump administration, according to one current and three former officials with the Education Department’s federal student aid office.

“Treasury told us, in no uncertain terms, that they did not want to have anything to do with it,” said Wayne Johnson, the chief operating officer at Federal Student Aid during the first Trump administration. “They didn't have the capacity to handle the collections, and they certainly had no understanding about the concepts of basically resolving a default or a delinquency. They were in the business of very intense, hardcore collections.”

A major concern inside the agencies revolves around the fact that Treasury doesn’t have experience with a key part of the job held by the Education Department: reaching repayment deals that borrowers can manage while also helping to repair their credit. This process is known as account rehabilitation.

“Treasury will do an unbelievably good job at draconian collections,” Johnson said earlier this month. “What they’re not prepared to do because they never had to do it before — and they’re not even thinking about it — is account rehabilitation.”

Education Undersecretary Nicholas Kent said he is working with Treasury to modernize the rehabilitation process at an event at the American Enterprise Institute on Thursday. He said the two agencies are thinking about how they could “automate” the process and “use AI to give the borrower a better experience,” but didn’t elaborate on how the department plans to do that or a timeline.

He credited Treasury with coming up with the idea, saying it will give borrowers another avenue to get into good financial standing.

“We want to make sure that we're giving students the tools to be able to rehabilitate their loans,” Kent said. “While we have tools like administrative wage garnishment and Treasury offset — which the Treasury Department is very good at using — we want to make sure that we don't start with those tools.”

Ellen Keast, an Education Department spokesperson, said the portfolio has been poorly managed for decades, something the Trump administration is looking to change.

“The Trump Administration is committed to getting it in better shape by entrusting the experts at Treasury to provide better oversight and implementing President Trump’s Working Families Tax Cuts Act that will simplify student loan repayment and provide long overdue consistency and clarity to borrowers,” Keast said in a statement.

Earlier this year, Education Secretary Linda McMahon noted her agency’s frustrations in getting people to pay up.

“During the previous administration, I think the whole repayment of loan issues became just so confusing. … People just stopped paying,” she said, noting the Education Department had paused its collection efforts. 

The Treasury Department did not respond to a request for comment.

Treasury is partnering with the Education Department to take on this new responsibility as part of Trump’s efforts to dismantle the Education Department. Although Congress needs to approve the shuttering of the agency, the Trump administration has pursued an incremental approach in the interim by shifting education responsibilities to other federal departments using interagency agreements.

This wouldn’t be the first time the two agencies have partnered.

The Education and Treasury departments launched what was supposed to be a two-year pilot study in 2015. One year in, Treasury only completed rehabilitation for eight borrowers out of a pool of 5,729. That pilot may presage some of the challenges involved in the latest Trump administration effort, noting that student loans in default “differ significantly from other federal debts” managed by Treasury and are “very difficult to resolve.”

It’s unclear if a final report on the pilot was ever issued.

Under the latest interagency agreement, the Education and Treasury departments will work with a private contractor, which was not the case for the pilot. This time around, Treasury will be overseeing some of the work instead of doing it themselves.

Since the findings of that initial pilot, Treasury’s resources have only been scaled back.

The Education Department has said Treasury’s Bureau of the Fiscal Service is “ideally positioned” to improve the federal student loan program, but that office has 39 percent fewer staff compared to 2024, according to U.S. Office of Personnel Management data.

Treasury has also been tasked with a growing list of assignments, including developing rules and guidance for the new federal tax credit aimed at boosting school choice, which was passed as part of the GOP’s sweeping domestic policy law last year.

Treasury officials likely did not decide to add student loans to their list of responsibilities on their own, said Colleen Campbell, who served in multiple director and manager roles at FSA during the Biden administration and early into the second Trump administration.

“In order to get two agencies to work together with a level of coordination, it is very likely that there needs to be very high up political intervention,” Campbell, who is now a senior associate partner at Bellwether, an education consulting firm.

The move will ultimately force Treasury into a role it wasn’t built for, Aaron Klein, a former deputy assistant secretary for economic policy at the Treasury Department from 2009 to 2012.

Generally, the agency advises the federal government on economic and financial issues and enforcing federal finance and tax laws. For the most part, it doesn’t run lending programs, with few exceptions that are much smaller and less complicated than the student loan portfolio, he said.

“Within the Department of Education, student lending is a core function — within Treasury it will be an ancillary appendage,” said Klein, who is now a senior fellow at the Brookings Institution, a left-leaning D.C. think tank. “Generally, organizations prioritize things within their mission and deprioritize ancillary appendages.”

It is also not clear which contractor Treasury will be working with for the long term.

The Education Department has an existing contract with Maximus to service student loans in default that is set to expire in July. The Education and Treasury departments did not respond to questions about whether they intend to extend or renew the contract.

Now, there are a lot more questions than answers about how the two agencies plan to implement the move, said Sarah Sattelmeyer, a senior adviser in Biden’s Education Department. She points to public documents that indicated Treasury is also seeking input from the industry to get a sense of what “potential bidders” have experience collecting on overdue student loans.

“This shows Treasury is still thinking through this,” Sattelmeyer said.

But the most critical thing the two agencies can do right now is to come up with a plan to help people get on plans to start regularly repaying their debts before forced collection efforts start again, said Sattelmeyer who is now a project director at New America, a left-leaning think tank.

“We should be trying to get as many people out of default as possible” while involuntary collections are paused, Sattelmeyer said.