Treasury's Student Loan Plan Carries Significant Risk

Why It Matters

Handing student loan defaults to Treasury may be a bigger gamble than it looks, according to a new Congressional Research Service (CRS) report. The report raises pointed questions about the Trump administration's plan to shift federal student loan default servicing to the Department of Treasury, a transfer that would hand Treasury a portfolio more than four times larger than anything it currently manages.

The administration's plan is a live test of whether a federal agency built to collect generic government debts can handle one of the most legally complex financial portfolios in the country, comprised of 7.8 million borrowers owing a total of $179 billion, all governed by a web of borrower protections, repayment options, and forgiveness programs that have no equivalent elsewhere in the federal debt collection system.

The CRS report, updated June 9, 2026, tells an evidence-based story: Treasury has tried this before, and it did not go well.

The Big Picture

The roots of this problem stretch back to the COVID-19 pandemic. Before March 2020, the Department of Education's (ED) Office of Federal Student Aid (FSA) ran a structured pipeline for managing defaulted federal student loann, routing accounts from servicers to a Default Resolution Group, then to private collection agencies, which used tools like administrative wage garnishment and Treasury Offset Program referrals to recover funds.

That system collapsed during the pandemic. Collection activities were suspended. Then, in November 2021, FSA cancelled its contracts with private collection agencies without transitioning to new ones. The consequences were stark. Total dollars collected from defaulted loans fell from $6.56 billion in fiscal year 2019 to $560 million in fiscal year 2025, a 91 percent drop. Administrative wage garnishment, which had generated $1.34 billion in fiscal year 2019, brought in just $510,000 in fiscal year 2025. Treasury Offset Program collections fell 92 percent.

The default portfolio itself tells a similar story. The balance of defaulted federally held student loans stood at $117.3 billion at the end of fiscal year 2025, then jumped to $179 billion by December 31, 2025, as borrowers who had been shielded by pandemic-era policies began falling into default again.

On March 19, 2026, the Department of Education and the Department of Treasury signed an interagency agreement to address the issue. Under the deal, Treasury's Bureau of the Fiscal Service would assume responsibility for servicing ED's defaulted federally held student loans through its existing Cross-Servicing Program. ED and Treasury described the arrangement as a way to "promote innovation and process improvements in pursuit of more effective federal student aid administration," arguing that ED is "ill-equipped" to manage the portfolio and that Treasury brings expertise in managing "highly complex financial and information technology systems."

The agreement is structured in three phases. Phase 1 covers defaulted loans. Phase 2 would extend Treasury's reach to non-defaulted loan servicing. Phase 3 would have Treasury review programmatic eligibility requirements, including administration of the Free Application for Federal Student Aid. The CRS report focuses on Phase 1, but the broader arc is clear: the administration is systematically reducing the Department of Education's operational role in student loan administration.

The interagency agreement was executed without congressional action. ED acknowledges in the agreement that Treasury "intends to revoke" FSA's exemption from the Debt Collection Improvement Act (DCIA), an exemption that has been in place since 2001, through administrative action alone. Whether existing statutes clearly authorize Treasury to service student loans, rather than merely collect debts referred to it, is a legal question the CRS report leaves open.

The scale of what Treasury is being asked to absorb is significant. Fiscal Service currently manages roughly 1.9 million debtors with about $119.1 billion in federal nontax debt through its Cross-Servicing Program. Adding ED's defaulted portfolio would mean absorbing approximately 7.8 million additional debtors and $179.1 billion in additional debt, roughly a fourfold increase in the number of borrowers the agency is responsible for engaging.

That increase arrives at a moment when Fiscal Service's workforce has shrunk by approximately 40 percent between September 2024 and February 2026, according to Office of Personnel Management data cited in the report.

Critics, including Sen. Elizabeth Warren and Democratic colleagues, wrote to Education Secretary Linda McMahon and Treasury Secretary Scott Bessent in April arguing that Treasury "lacks expertise in the highly unique and complex federal student loan system" and that Fiscal Service may not be adequately resourced for the transition.

The CRS report does not endorse that view, but it does surface data that supports the concern. Between February 2015 and October 2017, Fiscal Service and FSA ran a pilot program in which Treasury directly serviced a sample of 16,242 defaulted federal student loans representing 5,729 borrowers with a balance of about $80 million. The results were unfavorable. Fiscal Service resolved 4.14 percent of the loans referred to it. FSA-contracted private collection agencies resolved 5.46 percent of a comparable control group. PCAs outperformed Fiscal Service on every metric the report evaluated.

Fiscal Service attributed the gap to several factors: it moved slowly on administrative wage garnishment, called borrowers less frequently than specialized agencies, and lacked the customized digital tools, including self-service portals and systems designed to manage the rehabilitation process, that private collection agencies had built specifically for student loan borrowers. The pilot ended early in October 2017 due to a system change, and no final report on its results was ever published.

The CRS report notes that Fiscal Service could apply lessons from that experience to improve its performance this time. It also notes that the interagency agreement contemplates a graduated referral of loans to the Cross-Servicing Program, which could allow Treasury to build expertise before scaling up. But the report stops short of predicting success, and the unanswered questions from the pilot leave significant uncertainty.

Student loan servicing is unlike most federal debt collection in ways that matter operationally. Borrowers often have outdated contact information on file from when they first took out loans years earlier. Resolution options, including rehabilitation, consolidation, and income-driven repayment enrollment, are legally complex and require extended borrower engagement. Fiscal Service found during the pilot that calls to student loan borrowers ran "materially longer" than calls regarding other debts, and that the rehabilitation process is "difficult to complete." Following years of COVID-related collection pauses, some borrowers may be especially difficult to re-engage.

Political Stakes

For the administration, the interagency agreement serves a dual purpose. It is a concrete step toward dismantling the operational infrastructure of the Department of Education, consistent with a March 2025 executive order directing Secretary McMahon to "take all necessary steps to facilitate the closure" of the department. It also signals a harder line on collections, resuming use of the Treasury Offset Program after years of suspension and potentially deploying Treasury's more aggressive collection posture against millions of borrowers who have been largely shielded since 2020.

For Republicans, the arrangement offers a fiscally conservative argument: a $179 billion defaulted portfolio that was generating $6.5 billion in annual collections in fiscal year 2019 and now generates a fraction of that is a problem that demands a solution. Shifting management to an agency with centralized debt collection infrastructure is a defensible answer.

For Democrats, the political exposure is different. The concern is not just that Treasury lacks the expertise to address the problem, but also borrower-facing. If the student loan servicing transition disrupts access to rehabilitation, income-driven repayment, or forgiveness programs, millions of borrowers could find themselves worse off. Senator Warren's letter framed the issue in those terms, and the pilot program data gives that concern some empirical grounding.

For the public, the stakes are direct. Nearly one in five federal student loan borrowers is currently in default. How Treasury manages outreach, resolution options, and involuntary collection tools will determine the future of that number, and of borrowers.

The Bottom Line

Although the CRS report does not say the transfer will fail, it documents in careful detail the gap between what Treasury has been asked to do and what it has demonstrated it can do. The one time Fiscal Service tried to service defaulted student loans directly, it underperformed specialized agencies on every measure (and the program ended before a final assessment could be completed).

Congress authorized none of this. The interagency agreement was signed administratively, the DCIA exemption is being revoked administratively, and the timeline for implementation remains unspecified. For lawmakers on both sides who oversee a $1.7 trillion federal student loan portfolio, that combination — large scale, uncertain capacity, limited congressional input — is a looming tension, as outlined by the CRS report.

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