Student loan transfer to Treasury slammed as ‘illegal’ by Democratic lawmakers as 9 million defaulted borrowers targeted first
A group of Democratic lawmakers is intensifying its push to halt a sweeping plan to transfer federal student-loan management from the Department of Education to the Treasury Department.
In a detailed letter sent April 1, senators; including Elizabeth Warren and Bernie Sanders argued the move could disrupt the system and harm millions of borrowers.
The letter significantly expands on earlier concerns, framing the proposal not just as risky, but potentially unlawful and costly for taxpayers.
The senators sharply criticized the interagency agreement (IAA), writing that it represents “the latest attempts of the Trump Administration to illegally dismantle the Department of Education (ED).”
They added that the administration “has not even tried to explain how this will improve the administration of federal student aid programs nor provided any information to Congress or the American public about how much this scheme will cost.”
$1.7 trillion student loan portfolio at stake
The controversy stems from a March 19 announcement that the Department of Education would begin transferring its $1.7 trillion federal student-loan portfolio to the Treasury Department.
Officials said last month that the Education and Treasury Departments reached an interagency agreement under which Treasury will take responsibility for collecting on defaulted federal student loan debt. The partnership will be implemented in phases, with future steps potentially including operational support for non-defaulted loans “to the extent practicable and permitted by law.”
The agreement marks the first formal shift in responsibilities as the administration pursues its broader goal of dismantling the Education Department and redistributing its functions across federal agencies.
The Education Department estimates the federal student loan portfolio now stands at nearly $1.7 trillion. Less than 40% of borrowers are currently in repayment, while almost 25%; roughly $425 billion are believed to be in default.
Officials say the scale of the portfolio and high delinquency rates underscore the need for a new approach to managing the debt and returning borrowers to active repayment status.
The first phase of the transfer would place responsibility for collecting defaulted student loans with Treasury. Lawmakers warned this could worsen the already strained system.
Defaulted borrowers could face first wave of disruption
The transition is expected to occur in phases, starting with roughly 9 million borrowers in default; nearly a quarter of the approximately 40 million Americans with student debt.
The Democrat lawmakers wrote that the plan “appears likely to worsen the student loan default crisis,” citing concerns that Treasury lacks the specialized expertise required to help borrowers successfully exit default.
The letter points to a prior pilot program conducted during the Obama administration involving Treasury’s Bureau of the Fiscal Service. According to lawmakers, the results were stark.
By the end of the trial, Treasury had completed rehabilitations for just eight defaulted borrowers, while the Department of Education completed more than fifteen times as many in a comparable group; raising questions about Treasury’s effectiveness in this role.
Trump’s campaign pledge to dismantle Education Department
During his 2024 election campaign, President Trump pledged to dismantle the Education Department as part of a broader conservative effort to reduce the federal government’s role in education and shift more control to states.
While 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 transfer responsibilities.
Linda McMahon defends Treasury taking over debt collection
Education Secretary Linda McMahon is sending a letter to 43 million Americans with student loan debt; about 9 million of whom are in default; informing them that Treasury will take over 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 integrity and accountability for you, the American people,” McMahon writes in the letter.
She added that the Education Department “has proven woefully unable to collect on debt owed to taxpayers.”
Broader policy changes cited as worsening borrower strain
The senators argued the transfer is part of a broader pattern of policy changes that have made repayment more difficult for borrowers.
They cited actions including staffing cuts at Federal Student Aid, changes to repayment programs, resumed interest charges for some borrowers, and the rejection of applications for affordable repayment plans. Together, they said, these steps have increased costs and confusion for families navigating repayment.
The senators reiterated earlier warnings that the transfer “threatens to trap student loan borrowers, students, and families in chaos and bureaucracy, all while American taxpayers are left to foot the bill.”
They also pointed to prior interagency agreements that increased administrative costs, arguing that shifting responsibilities between agencies can create inefficiencies and delays in delivering aid.
Lawmakers are demanding detailed answers from the Treasury and Education Departments by April 15, including projected costs, staffing plans, and performance benchmarks.
They also asked how Treasury would ensure debt collectors comply with consumer protection laws and how it would communicate with borrowers in default. The letter raises concerns that borrowers could face reduced guidance and fewer options during repayment.
Treasury Secretary says the shift reflects a push for stronger financial discipline
“Under President Trump’s leadership we are undertaking the first serious effort to clean up a $1.7 trillion portfolio that has been badly mismanaged for years,” Bessent said. “Treasury has 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.”
Because the Treasury Department includes the Internal Revenue Service, officials note the agency has tools to collect delinquent debt; 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 as low as 10% of discretionary income, providing a potential pathway back to good standing.
Beyond defaulted loans, the plan’s later phases could shift even more responsibilities to Treasury, including managing the full student-loan portfolio and overseeing elements of federal financial aid.
Lawmakers argue such moves would violate federal law, which assigns those duties to the Department of Education, and could further complicate an already complex system.
FAFSA process and current repayment channels unchanged
McMahon emphasized that the Free Application for Federal Student Aid (FAFSA) process will remain unchanged despite the administrative shift. Borrowers already making payments should continue using their existing loan servicers.
“Treasury will assume operational responsibility for collecting on defaulted student loan debt and provide support to help return borrowers to repayment,” the letter states.
Prior to the agreement, the Education Department’s Default Resolution Group handled collections for borrowers who had missed payments for at least 270 days; the threshold that typically triggers default.
Under the new arrangement, Treasury will assume those responsibilities first before potentially expanding its role to broader loan-management operations.
Repayment overhaul tied to broader policy changes
The timing of the transfer coincides with preparations to implement sweeping repayment reforms included in Trump’s recent spending legislation. The administration says the interagency partnership presents a “promising opportunity to return borrowers to repayment” as new plans and borrowing caps take effect.
Officials previously explored shifting loan oversight to other agencies, including the U.S. Small Business Administration, before ultimately deciding on Treasury.
Despite the criticism, Education Department officials continue to defend the initiative. Ellen Keast, the department’s press secretary for higher education, said “now is the time for a hard reset in how the federal government provides and services student loans.”
“We are confident that our partnership with the Treasury, an experienced and proven fiduciary, will strengthen program administration and better serve American students, borrowers, and taxpayers,” Keast said.
Treasury Secretary Scott Bessent has also said the agency has the “operational capability” and “financial expertise” to improve oversight.
Critics warn of uncertainty for borrowers
With millions of borrowers potentially affected, lawmakers are urging the administration to halt the plan entirely.
“We call upon you to rescind these IAAs immediately,” the senators wrote, warning the changes could deepen the student loan crisis rather than resolve it.
Consumer advocates have raised concerns about the transition. Critics say shifting student loan management to Treasury “raises a new set of obstacles and uncertainty with no plan in place to resolve them.”
Colleges also face scrutiny over rising debt levels
In her letter, McMahon criticized higher-education institutions for relying heavily on federally backed loans, arguing the practice has helped drive tuition increases.
“Americans have taken on crippling student debt as colleges raise tuition and treat federally-backed loans as a blank check underwritten by American taxpayers, leaving millions floundering financially,” she wrote. “In fact, 23% of bachelor’s and 43% of master’s degree programs leave students worse off than had they not enrolled.”
As the phased transfer begins, millions of borrowers will be watching closely to see whether the shift improves repayment outcomes; or adds new complexity to an already strained system.
Like Financial Freedom Countdown content? Be sure to follow us!
14 essential strategies to maximize your Social Security and avoid costly mistakes
Social Security is a vital lifeline for many seniors, providing crucial income support during retirement. With inflation at its highest in four decades, Social Security’s inflation-adjusted benefits offer protection against rising costs.
Rising interest rates have disrupted many retirement portfolios, causing bond fund values to plummet. In this volatile financial landscape, Social Security can stabilize a typical stock-bond retirement portfolio. By implementing smart strategies, retirees can maximize their Social Security benefits and ensure a more secure financial future.
14 Essential Strategies to Maximize Your Social Security and Avoid Costly Mistakes
Did you find this article helpful? We’d love to hear your thoughts! Leave a comment with the box on the left-hand side of the screen and share your thoughts.
Also, do you want to stay up-to-date on our latest content?
1. Follow us by clicking the [+ Follow] button above,
2. Give the article a Thumbs Up on the top-left side of the screen.
3. And lastly, if you think this information would benefit your friends and family, don’t hesitate to share it with them!
John Dealbreuin came from a third world country to the US with only $1,000 not knowing anyone; guided by an immigrant dream. In 12 years, he achieved his retirement number.
He started Financial Freedom Countdown to help everyone think differently about their financial challenges and live their best lives. John resides in the San Francisco Bay Area enjoying nature trails and weight training.
Here are his recommended tools
Personal Capital: This is a free tool John uses to track his net worth on a regular basis and as a retirement planner. It also alerts him wrt hidden fees and has a budget tracker included.
Platforms like Yieldstreet provide investment options in art, legal, real estate, structured notes, venture capital, etc. They also have fixed-income portfolios spread across multiple asset classes with a single investment with low minimums of $10,000.
