US Department of Education to Transfer Millions of Defaulted Student Loan Accounts to Treasury Department

The US Department of Education announced in March that it would transfer millions of federal student loan accounts to the Treasury Department. The process will start with accounts of borrowers in default. This action is part of efforts to adjust the management of federal student aid programs.

Defaults on federal student loans occur after 270 days of missed payments. Approximately 9 million borrowers are currently in default, marking a record high. The transfer aims to address management of these accounts.

2015, the Obama administration conducted a pilot program to assess the Treasury Department's ability to collect on defaulted student loans.

The program involved transferring about $80 million in defaulted loan accounts to the Treasury. A control group of similar accounts remained with private debt collection agencies. The pilot lasted one year.

One year in, the Treasury had collected 4.1% of its borrowers' loans, compared with 5.5% in the control group. In dollar terms, the Treasury recovered 0.38% of its $80 million defaulted loan portfolio, compared with a 3.4% recovery rate for the private collector portfolio.

The 2015 pilot report highlighted several reasons for the Treasury's lower recovery rate. It said that the agency "proceeded relatively slowly" through the collections cycle to boost voluntary payments from borrowers, and that it called borrowers less frequently than private collectors did.

The report also said that borrowers were confused about why a third party — either the Treasury or a private collector — was contacting them instead of the Department of Education itself. Having a clear point of contact is crucial for borrowers, said Arne Duncan, the education secretary under former President Barack Obama.

During his tenure, he tried to establish what he called "one state desk" — a clear point of contact for anyone to call about a specific issue. "Now, you might have to call five or six or seven different agencies," Duncan said. " Ultimately, the Obama administration did not move forward with the pilot.