Cover Story: Federal Student Loans Are Moving to the U.S. Treasury Department

In 2024, President Trump campaigned on dismantling and downsizing the U.S. Department of Education (ED) to return education to the state and local levels, where it had historically been before the department’s creation in 1979. Throughout its controversial history, policymakers across the political spectrum have been vocal about the ED’s deficiencies and its lackluster results in improving educational outcomes for America’s youth. Although the ED should not bear the full brunt of those criticisms, there are some merits to the claims.

Previously, President Trump announced in March 2025 that the Small Business Administration would oversee the ED’s federal student loan portfolio, according to media reports by the Chronicle of Higher Education and Fortune. At the time, the National Association of Student Financial Aid Administrators (NASFAA) interim president and chief executive, Beth Maglione, scoffed at the idea by noting such a move would require Congressional action to approve the move. Facing legal hurdles from a court order that effectively blocked the transfer of the loan portfolio to the SBA, the Trump Administration abandoned its initial proposal of moving the administration of federal student loans to the SBA.

In a shocking turn of events, the Trump administration announced on March 19, 2026, an interagency agreement between the ED and the U.S. Department of Treasury that would transition the nation’s $1.7 trillion federal student loan portfolio over three phases.

Three Phases

In phase one, the Treasury Department will immediately take over operational responsibility for collecting on defaulted federal student loan debt. Currently, the Treasury Department serves as the central collections agent for the federal government through its Treasury Offset Program (TOP). TOP garnishes wages, withholds tax refunds, and reduces Social Security benefits for borrowers with defaulted federal student loan obligations. By taking over the operational responsibility for collecting defaulted federal student loan obligations, the Treasury Department will further engageimmerse itself inin the lives of everyday Americans who are in default on their federal student loan obligations. It’s unclear what role the ED will have in rehabilitating defaulted federal student loans in this new framework.

In phase two, the Treasury Department will assume responsibility for non-defaulted federal student loans, a significant departure from the current practice of federal student loan servicers working in conjunction with the ED to administer the repayment process. There is currently no set timeframe for when this phase will commence.

In phase three, the Treasury Department will assume key administrative functions at the ED, including managing the Free Application for Federal Student Aid (FAFSA) form, which has seen its share of controversies over the last few years. There is no timeline for when this phase will commence. Political pundits and educational policymakers surmise that a transition of this nature is years away.

What Does This Mean for Borrowers?

More than 40 million borrowers hold federal student loans in their name. Current federal student loan borrowers do not need to take immediate action. A fact sheet published by the ED states that borrowers should continue to work with their existing loan servicer. Repayment options remain the same. Trump administration officials anticipate that the move will be seamless for all federal student loan borrowers. Congressional critics differ with that assessment. Without clear statutory authority, the ED could suffer setbacks with this transition. Any disruption from a shaky transition will likely affect operations at the ED, harming federal student loan borrowers and future student aid recipients.

According to the fact sheet, borrowers with defaulted student loans should contact their loan servicer or visit https://myeddebt.ed.gov/ to learn more about rehabilitation options for their defaulted federal student loan obligations.

Rationale for the Transition

On March 19, the ED published a press release announcing the “historic federal student assistance partnership” between the ED and the Treasury Department. At the time of the press release, the ED noted that the student loan portfolio was $1.7 trillion, with fewer than 40% of borrowers in satisfactory repayment status. Almost 25% of all federal student loan borrowers are in default.

Perhaps most revealing in the press release were these two facts: federal student loan debt is now larger than the combined endowments of all American universities. It is larger than either the nation’s cumulative credit card or auto debts. Intriguingly, the press release cites a 2017 op-ed by the U.S. Senate Committee on the Budget that highlights the immense size of the ED’s federal student portfolio. According to the op-ed, the ED’s loan portfolio would make it the fifth-largest bank in the country. In fact, the op-ed also points out that federal student loans are the single largest asset on the government’s balance sheet.

U.S. Secretary of Education Linda McMahon made the following statement in the press release about the historic partnership between the two departments:

“As the Federal student aid portfolio soars to nearly $1.7 trillion and with nearly a quarter of student loan borrowers in default, Americans know that the Department of Education has failed to manage and deliver these critical programs effectively. By leveraging Treasury’s world-renowned expertise in finance and economic policy, we are confident that American students, borrowers, and taxpayers will finally have functioning programs after decades of mismanagement.”

U.S. Secretary of the Treasury Scott Bessent also commented in the press release about the unique role the Treasury Department plays in this strategic partnership:

“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. 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.”

Treasury Department’s Existing Role in Federal Student Aid

While the Trump Administration states that this partnership is historic, the two departments already work together in several areas of federal student aid processing.

Presently, the Treasury Department handles the transfer of student loan funds to schools. Schools must manage these payments carefully to prevent costly snafus that violate complex regulations. Schools request this funding through an online portal that initiates the action between the Treasury Department and the institution.

When a student completes a FAFSA form, the ED uses federal tax information from the Internal Revenue Service’s data systems to verify income for applicants and their contributors. This data-sharing agreement obviates the need to enter financial information on the form manually. Students enrolled in an income-driven repayment plan are also subject to this data-sharing agreement.

Both departments have overlapping contracts with private collection agencies that have inherent experience in collecting defaulted federal student loan obligations.

The One Big Beautiful Bill Act (OB3) launches a revamped accountability framework for institutions of higher education. This accountability framework relies on employment data sharing between the two departments to adequately calculate the earnings premium measures used extensively in the reporting.

Long-Term Viability is In Doubt Without Congressional Approval

In essence, this “historic partnership” is another step forward in collaboration with both federal departments to achieve the Trump Administration’s objective of simplifying the ED to its core mission of educating students. The fact sheet conveys the belief that this “historical partnership” is a logical next step for both departments in their longstanding relationship. Essentially, the Treasury Department will assume a more involved operator role in federal student aid than its existing role as a back-end partner.

According to an NPR news article published in March 2026, the ED conceded that it cannot allow the Treasury Department to assume its entire loan portfolio. That action would require Congressional approval.