Trump shifts $1.7 trillion student loan debt to Treasury in major Education Department overhaul
The administration of President Trump is taking a major step toward reshaping how the federal government handles student debt, announcing plans to transfer key loan-management functions from the U.S. Department of Education to the U.S. Department of the Treasury. The move begins with defaulted borrowers and could expand to broader operational support for the nation’s $1.7 trillion student loan portfolio.
Interagency agreement launches phased transfer
Officials said Thursday 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.
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.”
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.
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.
Critics warn of uncertainty for borrowers
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.
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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.
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