Student loans shift to Treasury in major policy overhaul

The Trump administration is expected to send the nearly $1.7 trillion student loan portfolio from the Department of Education to the Treasury Department amid its ongoing winding down of the agency, the Dept. of Education announced Thursday.

The move will start by impacting roughly 10 million borrowers who’ve either defaulted on their loans or are in late-stage delinquency, according to senior department officials.

In a multi-phase process to procure the Education Department’s federal student aid services, senior department officials on a call with reporters emphasized that the large-scale decision is part of a new interagency agreement (IAA) with the Treasury.

The announcement marks a “historic step” toward fulfilling President Donald Trump’s pledge to abolish the agency, according to Secretary of Education Linda McMahon.

“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 effectively manage and deliver these critical programs,” McMahon wrote in a press release.

“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,” McMahon added.

However, Roxanne Garza, the director of higher education policy at EdTrust, an education advocacy group, said the changes coming to the student loan system add more confusion for borrowers.

“We are very concerned about what this means for these loans for defaulted borrowers,” Garza told ABC News, adding, “The worry is what would that look like if this portfolio does move to Treasury, what kind of support would borrowers have?”

“This will just be another big policy shift, another big implementation shift, etc. Who do they go to for questions? What are their options? I think this just adds another level of chaos and confusion and complexity to the situation,” Garza said.

A senior Department of Education official said the agency is making a “hard reset” of the federal student aid programs. In the agency partnership announced Thursday, the Treasury absorbs the loans from borrowers who are in default or haven’t paid their debts for at least nine months. According to education experts, when a loan officially enters default, it becomes eligible for mandatory collections, which can negatively impact credit scores, future student aid, or revoke driver’s licenses.

The Treasury will assume operational responsibility — previously administered by the Office of Federal Student Aid — for collecting on defaulted federal student loan debt and provide operational support to the education department’s efforts to return borrowers to repayment, according to the release.

This move is months in the making and aligns with the agency’s recent actions to phase out Biden-era student loan repayment plans. Under the Working Families Tax Cuts Act, a new income-driven repayment plan will be made available for borrowers on July 1. Department of Education officials stress that the student loan changes are to streamline the system and borrowers should work with the agency’s Federal Student Aid office to help them repay their loans.

House Education and Workforce Committee Chairman Rep. Tim Walberg, R-Mich., celebrated the department’s recent actions, including the agency partnership.

“This shift will simplify how aid is delivered, reduce delays, and make better use of taxpayer dollars,” Walberg wrote in a statement, adding, “Most importantly, it will make the process easier and more reliable for students and families who depend on this support.”

A person walk past the Department of Education in Washington, D.C, Sept. 30, 2025. Salwan Georges/The Washington Post via Getty Images

Ranking Member Rep. Bobby Scott, D-Va., said it’s unclear if the administration’s goal is to “intentionally create chaos and confusion” for borrowers already burdened by economic challenges.

“As the cost of living continues to rise, Americans are already juggling student loan payments on top of groceries, gas, child care, health care, and housing,” Scott wrote in a statement. “This is the last thing student borrowers need.”

The Education Department has implemented at least ten IAA partnerships aimed at shuttering the agency under McMahon’s supervision, including with the Departments of Health and Human Services, Interior, Labor and State. McMahon has been a vocal advocate for rehoming all or parts of the student debt portfolio to Treasury under Secretary Scott Bessent.

She’s said it’s a “natural area” for student loans to reside.

“The secretary has been clear here over the course of the last several months that the Department of the Treasury is best positioned to assume responsibility,” according to a senior department official on the call. “We already work with them, so it just makes sense.”

“They already are integrated into the Free Application for Federal Student Aid [FAFSA] process, the income-driven repayment process, so we are a seamless partner and this is the next iteration of that phase in the relationship,” the official said.