Senators Argue Education Department Transfer of Student Loans to Treasury Is Illegal

A group of Democratic senators blasted the Trump administration this month for its plan to transfer oversight of the federal student loan system from the Education Department (ED) to the Treasury Department. The senators, led by Senator Elizabeth Warren of Massachusetts, argued that the proposed transition of student loan operations via an “interagency agreement” is illegal.

“This latest illegal scheme from the Trump Administration threatens to trap student loan borrowers, students, and families in chaos and bureaucracy, all while American taxpayers are left to foot the bill for Treasury to administer programs that ED can and should administer itself,” wrote the lawmakers in a letter to Education Secretary Linda McMahon and Treasury Secretary Scott Bessent last week. 

But so far, the Trump administration shows no signs of walking back the pledge to shift student loan responsibilities to Treasury. Here’s the latest, and what you should know.

Responsibility for student loans to be transferred to Treasury Department

Last month, the Trump administration announced that the Education Department would be transferring operational responsibility for the federal student loan system to the Department of Treasury. The transfer would be effectuated by an “interagency agreement” (IAA) between the two government departments, allowing for greater cooperation.

“The U.S. Department of Education (ED) and the U.S. Department of the Treasury (Treasury) today announced the Federal Student Assistance Partnership to enhance the administration of Federal student aid programs, mitigate the continuing fallout and cost to taxpayers from the Biden Administration’s mismanagement of the Federal student loan portfolio, and facilitate the return of defaulted borrowers to repayment,” said the Education Department in a joint statement with the Treasury Department last month.

“Under the new interagency agreement, Treasury will assume operational responsibility for collecting on defaulted Federal student loan debt and provide operational support to ED’s efforts to return borrowers to repayment. In subsequent phases, Treasury will work to provide operational support over non-defaulted Federal student loan debt, to the extent practicable and permitted by law, while also seeking opportunities to provide operational support to FSA’s other functions.”

Why the administration says Treasury is better equipped

The administration argued that the transfer of operations for the federal student loan system to the Treasury Department would ultimately be better for both federal student loan borrowers and taxpayers, particularly given the Treasury Department’s history of collaboration with the Education Department, such as by allowing borrowers to access their federal tax returns to support their applications for income-driven repayment (IDR) and facilitating certain collections efforts against borrowers with defaulted federal student loans.

“Treasury has the unique experience, the operational capability, and the financial expertise to bring long overdue financial discipline to the program and be better stewards of taxpayer dollars,” said U.S. Secretary of the Treasury Scott Bessent in the joint statement.

Senators argue transfer of student loans to Treasury is illegal and will harm borrowers

But Senator Warren and several other Democratic senators warned in their letter to top Trump administration officials last week that the proposed transfer of operational responsibilities for the federal student loan system would be both illegal and harmful for borrowers.

“The most recent IAA entails offloading ED’s fundamental responsibilities to manage student loans and federal student aid to Treasury, without Congressional authorization,” wrote Senator Warren, who was joined by Senators Bernie Sanders (I-Vt.), Ron Wyden (D-Ore.), Patty Murray (D-Wash.) and Tammy Baldwin (D-Wis.).

“Federal law is clear: there is established within ED a Performance Based Organization, FSA, and FSA is ‘responsible for the administration of Federal student financial assistance programs,’ which the Higher Education Act unambiguously says includes ‘administrative, accounting, and financial management functions,’ the ‘collection, processing, and transmission of data to students and institutions,’ and ‘providing all customer service, training, and technical support,’ among other activities… It is unlawful for that responsibility to be transferred to Treasury without an act of Congress.”

More chaos for borrowers

The senators also argued that the proposed transfer would introduce more chaos and uncertainty for student loan borrowers.

“Between the Trump Administration’s demonstrated lack of concern for the well-being of borrowers and Treasury’s lack of relevant expertise or staff capacity, the IAA appears poised to create even more chaos for borrowers,” they wrote. “The Trump Administration’s record of haphazard decision making and utter disregard for the actual issues facing students, families, and student loan borrowers suggests that this IAA will be implemented in a way that leaves borrowers with limited options and little to no guidance while increasing the number of borrowers in default and economic distress.”

Trump administration remains committed to transferring responsibility for student loans

The forceful letter by the group of Democratic senators appears to be the first coordinated attempt to put the brakes on the proposed transfer of operational responsibility for the federal student loan system. But so far, the Trump administration shows no signs of backing away from its plan.

“The student loan portfolio, now nearing $1.7 TRILLION, is worth more than all cumulative credit card debt in the U.S.,” said Education Secretary Linda McMahon in a statement on X on Tuesday. “[The Education Department] has been a failed manager of this portfolio, which is why we’ve partnered with @USTreasury to better serve borrowers and their families.”

A phased rollout, starting with defaulted loans

According to the interagency agreement between the Education and Treasury departments, the transfer of student loan operations will occur in phases. The initial phase will involve defaulted federal student loans, which have been in a state of suspended collections for more than six years. During the second and third phases, the Education Department will transfer student loan servicing operations for federal student loans in good standing, as well as administering the FAFSA form and other loan origination responsibilities, to the Treasury Department. Trump administration officials have tried to reassure borrowers that they will not experience any direct impacts during or following the transition.

“Throughout each phase of the partnership, ED, in conjunction with Treasury, will communicate directly with stakeholders, including students, parents, borrowers, institutions, and vendors, to outline anticipated plans and timelines and address any questions,” said the joint statement from the Education and Treasury departments. “Building on the Trump Administration’s successful efforts to fix the Free Application for Federal Student Aid form, the agencies will ensure that the partnership is implemented effectively and enhances the delivery of Federal financial aid for students and families.”

No firm timeline yet

The Trump administration has not provided specific timetables for when the initial phase, the transfer of defaulted federal student loans from the Education Department to the Treasury Department, will be completed or when the next phase involving the transition of student loan servicing operations will begin. 

Confused about what the Treasury transfer means for your loans? Book a consult to talk through your options with a Student Loan Planner expert.