U.S. Treasury takes over student-loan accounts amid default servicing risks

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Treasury takes over student loans

Highlights

Treasury's 2015 pilot for defaulted student loan collections recovered only 0.38% of an $80 million portfolio, trailing private collectors' 3.4% recovery rate.
Weak Treasury performance was attributed to slower collection processes and less frequent borrower contact, highlighting risks in borrower communication and multiagency coordination.
In January, the Department of Education paused involuntary collections, signaling ongoing operational and implementation challenges amid the Treasury's expanded servicing role.

Obama-era pilot offers warning for Treasury collections

In 2015, the Obama administration launched a pilot to test whether the Treasury could more effectively collect defaulted federal student loans and understand why borrowers struggled to repay. Treasury took over about $80 million in defaulted accounts, while a control group of private collectors managed a similarly sized portfolio. Sarah Bloom Raskin, who served as deputy treasury secretary at the time, says the effort exposed operational difficulties, including contacting borrowers and collecting the correct payment amounts.One year into the pilot, Treasury had collected 4.1% of borrower balances, compared with 5.5% in the control group, according to the article. In dollar terms, Treasury recovered 0.38% of its $80 million portfolio, versus a 3.4% recovery rate for private collectors. A 2015 pilot report cited slower movement through the collections cycle and less frequent borrower outreach as factors behind the weaker recovery performance.The report also says borrowers were often confused about why a third party, rather than the Department of Education, was contacting them. Former Education Secretary Arne Duncan says a clear point of contact is critical for borrowers navigating repayment problems. The Obama administration ultimately does not proceed with a broader rollout of the pilot.

Borrower communication and multiagency coordination remain central risks

Education Secretary Linda McMahon says in a March press release that her department has failed to manage these programs effectively, while Treasury Secretary Scott Bessent says the agency has the operational and financial expertise to impose more discipline on the system. The administration also argues that Treasury already disburses federal student aid funds, making the transfer a logical next step. Preston Cooper of the American Enterprise Institute says Treasury's access to tax information could help it better assess borrower finances and causes of nonpayment.Former officials and policy analysts say collections and disbursement are distinct functions with different operational demands. Raskin says distributing aid and collecting delinquent debt require separate systems and expertise, suggesting implementation may be more difficult than the administration indicates. That concern is especially significant because defaulted borrowers often need detailed guidance to return to good standing.In January, the Department of Education pauses involuntary collections on defaulted loans, temporarily shielding borrowers from wage garnishment and tax refund seizures. Sarah Sattelmeyer of New America says splitting systems across multiple agencies could weaken communication with borrowers and complicate efforts to streamline the program. For borrowers already in distress, the effectiveness of Treasury's takeover is likely to depend on whether the government can provide a simple and consistent servicing structure.

We previously reported on the Department of Education’s renewed oversight actions tied to pandemic-era education relief programs, after inspector general findings pointed to improper spending and alleged fraud. That update highlighted cases involving misspent and wrongly distributed federal COVID-19 aid and signaled tighter scrutiny of documentation, procurement, and eligibility controls across education funding.

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