Student Loan Default Transfer to Treasury Raises Capacity Questions for Federal Collections

The U.S. Treasury Department is preparing to take over servicing of $179 billion in defaulted federal student loans owed by about 7.8 million borrowers, according to a new Congressional Research Service report that raises questions about staffing, borrower communications and collection capacity.

The March 19 interagency agreement between the Department of Education and Treasury calls for Treasury’s Bureau of the Fiscal Service to assume responsibility for defaulted federally held student loans through its Cross-Servicing Program.

The agreement is structured in phases. Phase 1 covers defaulted loan servicing. Phase 2 would move administrative operations for non-defaulted loans to Treasury “to the extent practicable.” Phase 3 would have Treasury review rules governing student aid eligibility, including FAFSA administration.

The CRS report focuses on Phase 1 and notes that the agreement does not set a specific timeline.

CRS Flags Scale and Staffing Concerns

The transfer would significantly expand Treasury’s existing collection workload. CRS said Treasury’s Cross-Servicing Program currently handles about 1.9 million debtors owing $119.1 billion. Adding the student loan portfolio would bring in about 7.8 million additional borrowers and $179 billion in debt.

The report also noted that the Bureau of the Fiscal Service lost roughly 40% of its workforce between September 2024 and February 2026, raising operational questions as Treasury prepares to absorb a much larger debtor population.

Treasury has signaled that contractors may play a role. In March, the bureau issued a request for information seeking input on “default resolution agent” firms to assist with defaulted student loan servicing.

Collections Remain Paused, But Borrower Risk Remains

Federal student loan collection activity has been largely paused since March 2020. CRS said collections through litigation, voluntary payments, wage garnishment, and federal offsets fell from $6.56 billion in fiscal year 2019 to $560 million in fiscal year 2025.

Administrative wage garnishment dropped from $1.34 billion in fiscal year 2019 to $510,000 in fiscal year 2025.

For borrowers, the immediate effect may be confusion as communications, payment arrangements and servicing responsibilities shift between agencies or contractors. When involuntary collections resume, defaulted borrowers could face wage garnishment, federal tax refund offsets and potential withholding from certain federal benefits, subject to applicable limits.

Prior Treasury Pilot Produced Mixed Results

CRS also reviewed a prior Treasury pilot involving defaulted student loans. In 2015, the Bureau of the Fiscal Service tested the collection of a sample of defaulted loans. After one year, Treasury resolved 4.14% of referred loans, compared with 5.46% for a control group handled by Education Department private collection agencies.

Treasury attributed the results partly to its own collection choices, including delayed wage garnishment and limited call frequency, as well as the complexity of student loan resolution options.

The pilot ended in 2017, and CRS said no final report is publicly available.

ARM Industry Implications

For the accounts receivable management industry, the transition could create new operational opportunities and compliance challenges.

Contractors involved in default resolution may need to manage high-volume borrower outreach while navigating federal student loan rules, rehabilitation options, consolidation pathways, fee limits, wage garnishment procedures, and borrower communication requirements.

The transfer also comes as federal policymakers continue to scrutinize the role of private debt collection firms in student loan recovery. That scrutiny may affect contracting standards, oversight expectations and borrower-facing communication practices.

What Borrowers May Need to Watch

Borrowers in default still have established pathways out of default, including loan rehabilitation, consolidation, and payment in full. CRS noted that effective July 1, 2027, borrowers will be allowed to rehabilitate federal student loans twice instead of once.

Until Treasury’s role becomes clearer, borrowers may need to carefully review any new communications, verify official contact information and understand whether they are working with the Education Department, Treasury or a contractor acting on the government’s behalf.