What Does Treasury’s Takeover of Federal Student Loans Mean for Borrowers?

A significant change in the administration of federal student loans may soon impact borrowers across the U.S. Following reports that the U.S. Treasury will assume a more significant role in administering federal student loan debt, such an arrangement may lead to a complete overhaul of the existing system that has been administered by the Department of Education. 

Given that there is approximately $1.7 trillion of current student loan debt, there can be many aftereffects of small administrative or policy changes.

For borrowers, the basic question is, "Will this make repaying student loans easier, harder, or more confusing?" The purpose of this article is to provide a simple overview of what this transition could mean for borrowers.

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Why Is the Treasury Taking Over Federal Student Loans?

The primary reason for the administration of federal student loans being proposed to change is due to repayment efficiency and an increase in borrowers defaulting on their loans.

 Currently, the U.S. Treasury administers the collection of federally issued student debt from borrowers, which includes the collection of delinquent accounts through various means, such as the garnishment of wages or the seizure of U.S. federal tax refunds.

The administration of the collection of student loans could lead to more efficient collection efforts for borrowers who are behind on their payments by centralizing all collections at one location under the U.S. Treasury.

In addition to having one central administration of the federal government responsible for the collection of all federally issued loans, policymakers may view having the U.S. Treasury oversee the administration of the federal student loan program as a way to increase financial accountability and improve the collection of delinquent accounts that have not been recovered due to the phaseout of COVID-19-related deferments.

How Will This Affect Monthly Payments?

Borrowers who are on track with their loans should not see any changes unless there are changes made to the servicer's policies or processes. 

Income-driven repayment plans (IDR plans), deferment options, and loan forgiveness continue to be governed by federal law, not just servicer policy.

If Treasury establishes new, more automated systems and also establishes stricter enforcement procedures, borrowers who don't double-check their payment dates or fall behind can expect to see a much more accelerated process from the time they miss a payment until they receive a penalty notice or until a collections action occurs.

Will Loan Forgiveness and Relief Programs Change?

The issue that we hear most frequently about is how these programs, such as Public Service Loan Forgiveness (PSLF) or income-driven forgiveness, may be impacted. 

Under current federal law, these programs will remain legally in place, so a change in administration will not remove them.

However, it is very likely that the Treasury will cause significant changes in those processes and will determine if borrowers are required to submit additional documentation or have greater compliance verification.

Therefore, borrowers will need to be more diligent regarding compliance and documentation.

What Happens to Defaulted Loans?

The Treasury has some of the greatest impact expected on recovering defaulted loans. 

They can withhold taxpayers' refunds or Social Security benefits as some of their most common ways of recovering loans. 

If they move to have direct responsibility over defaulted student loans, they will have the opportunity to recover them more aggressively and faster.

Additionally, for borrowers who are in default, the ratio of delays to flexibility may be reduced, as there could be fewer lenders involved. 

With a more centralized System, it would also be easier to have defined standards of what rehabilitation would look like for a defaulted loan.