Education Dept hands federal student loan portfolio to Treasury, in latest step to dismantle agency

The Treasury Department will take over the collection of defaulted federal student loan debt, and will support efforts to bring borrowers back into repayment.

The Education Department is handing off its trillion-dollar portfolio of federal student aid programs to the Treasury Department.

Last fall, the Education Department signed several interagency agreements to move its core programs to other parts of the federal government.

The Trump administration is looking to shutter the department, but can’t do so without approval from Congress.

Under the latest interagency agreement, the Treasury Department will take over the collection of defaulted federal student loan debt, and will support the Education Department’s efforts to bring borrowers back into repayment.

The department’s student loan portfolio stands at nearly $1.7 trillion. The Education Department says less than half of student loan borrowers are currently repaying those loans, and that nearly a quarter of student loan borrowers are in default.

The Education Department said in a press release that Treasury, in later stages of the agreement, will provide support on federal student loan debt that is not in default, “to the extent practicable and permitted by law.” Around that time, the Treasury Department will also administer the Free Application for Federal Student Aid (FAFSA). The Education Department says these changes won’t require student loan borrowers to take any additional action.

The Education Department said Federal Student Aid programs have faced a “long history of mismanagement.” In a fact sheet, the department said it’s seeing low repayment rates because the Biden administration “unlawfully administered repayment and forgiveness schemes that shifted debt to taxpayers, creating ongoing confusion for borrowers.”

The Biden administration terminated private collection contracts in 2021. The Education Department says it was left with “little vendor infrastructure” to handle inbound calls or conduct outbound calls to assist more than 9 million borrowers in default.

Education Secretary Linda McMahon said the “Department of Education has failed to effectively manage and deliver these critical programs.”

“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 said.

McMahon told employees last fall that dismantling the department and transferring billions of dollars in grant programs to other agencies would “break up the federal education bureaucracy” and improve government efficiency. But former Education Department employees and education nonprofits told Democratic lawmakers in a hearing last month that efforts to dismantle the department and redistribute its programs have led to confusion and higher costs.

According to an interagency agreement obtained by Federal News Network, the Education Department agreed to reimburse the Labor Department for up to $262,000 of expenses in fiscal 2025 and about $807,000 this year.

Rachel Gittleman, the president of the American Federation of Government Employees Local 252, said in a statement that interagency agreements moving Education programs to the Labor Department “have sown chaos for states and grantees, preventing congressionally mandated funding from going out on time and hamstringing federal employees who are trying to do their jobs on behalf of the public.”

“The Trump Administration continues to unlawfully dismantle the Education Department by moving programs and offices to other federal agencies despite clear warning from Congress that Education Secretary Linda McMahon lacks the authority to do so,” Gittleman wrote.

Congress recently passed a spending package for the rest of fiscal 2026 that increased funding for the Education Department, and rejected the Trump administration’s calls for deep budget cuts to reflect many of its core programs being moved elsewhere. But the department’s press secretary said in a statement last month that the 2026 appropriations bill “does not preclude the department from partnering with better-positioned federal agencies to manage federal education programs.”

Last year, the Education Department sent layoff notices to 1,400 employees. Another 600 employees, faced with the threat of layoffs, retired or accepted voluntary separation incentives.  All told, the department lost about half of its total workforce.

Nearly half of Federal Student Aid’s employees were laid off or left the agency under the Trump administration. The Government Accountability Office recently found that FSA stopped assessing student loan servicers on their level of customer service to borrowers in February 2025, “due to lack of staff capacity.”

GAO found that four of five loan servicers didn’t meet Education’s performance standards for keeping accurate records and faced financial penalties.

If you would like to contact this reporter about recent changes in the federal government, please email [email protected], or reach out on Signal at jheckman.29

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