Trump Administration Moves Defaulted Student Loans to Treasury for Collection via Existing Federal Program

President Donald Trump is transferring federal student loans from the Department of Education to the Treasury Department. Defaulted borrowers will be routed through the Treasury's Cross-Servicing program, which uses private contractors to collect federal debts. More than 10 million student-loan borrowers are in default or delinquency, Department of Education data shows.

Involuntary collections, which include wage garnishment and federal benefits seizure, have been paused since January while the department prepares for major repayment changes. The Trump administration says that the Treasury is best equipped to manage collections.

Because the Treasury already uses these companies to collect other payments, like taxes, using them is "the most straightforward way" to resume collections on defaulted student loans, said Colleen Campbell, former executive director of Federal Student Aid's loan portfolio management office under Biden.

Lawmakers and administration officials in Trump's first term pushed to terminate contracts with private collectors over high costs and accusations of predatory behavior. Former President Joe Biden ended their contracts in 2021. Lawmakers later said private collection agencies "receive more than ten times as much" money for steering borrowers into their preferred repayment option, despite high redefault rates.

In 2017, the CFPB sued Pioneer for engaging in "deceptive" and "abusive" practices and violating consumer protection laws, including by steering borrowers into costly forbearances instead of more favorable income-driven repayment plans. The court ordered the company in 2024 to pay $100 million to affected borrowers.

Transworld said at the time that it settled with the CFPB to avoid costly litigation.

Campbell added that private companies were previously criticized for their variable fee structures. Collecting on defaulted student loans requires specific knowledge of student-loan borrowers and policy, said Sara Partridge, the associate director of higher education at the Center for American Progress.

The Department of Education did not specify a timeline for the transfer to the Treasury, which will begin with defaulted borrowers before expanding to the broader federal loan portfolio.