Transition of Servicing Defaulted Federal Student Loans to the Department of the Treasury - Background and Observations

Oct 15, 2026

The report examines the shift in how defaulted federal student loan servicing will be handled, focusing on the role of the Department of the Treasury. As of December 31, 2025, the Department of Education held defaulted loans owed by about 7.8 million borrowers totaling $179 billion, collected through multiple administrative and legal tools. It outlines how COVID-19 collection pauses affected servicing, then describes the Treasury-ED interagency agreement entered on March 19, 2026, including Phase 1 referral through the Cross-Servicing Program and potential operational challenges, along with limited public evaluation evidence.

LanguageEnglish

CategoryResearch & Report

FormatPDF

Pages19

Reading Time48 min

AccessFree to download

Introduction

FSA Servicing of Defaulted Student Loans

Fiscal Service’s Cross-Servicing Program

The Treasury-ED Interagency Agreement

Phase 1 of the Treasury-ED IAA

Responsibilities to Be Performed by Each Party Under Phase 1

Funding of Phase 1 Under the Treasury-ED IAA

Transition of Servicing Defaulted Federal Student Loans to the Department of the Treasury: Background and Observations Updated June 9, 2026 Congressional Research Service [https://crsreports.congress.gov](https://crsreports.congress.gov)[ ](https://crsreports.congress.gov)R48962 Transition of Servicing Defaulted Federal Student Loans to the Department of the Treasury: Background and Observations As of December 31, 2025, the Department of Education’s (ED’s) portfolio of defaulted federal student loans comprises loans of about 7.8 million borrowers (about 18% of all federal student loan borrowers) owing $179 billion. To collect on defaulted federal student loans, the federal government may negotiate a repayment agreement with borrowers, report the loan default to consumer reporting agencies, initiate administrative wage garnishment (AWG) against borrowers, offset borrowers’ federal payments through the Treasury Offset Program (TOP), and/or refer a borrower’s case to the U.S. Department of Justice for civil litigation, among other actions. Borrowers may resolve the default through mechanisms such as payment in full, loan rehabilitation, and loan consolidation. ED’s Office of Federal Student Aid (FSA) is the primary entity that administers the Higher Education Act (HEA) Title IV federal student loan programs. Prior to policies implemented by ED in response to and following the COVID-19 pandemic (e.g., a pause in most debt collection activities), FSA and its contracted private collection agencies (PCAs) serviced defaulted student loans by using the above-described tools and assisting borrowers to resolve their loan default. FSA and its contractors significantly decreased their debt collection activities because of the COVID-19-related policies. Additionally, in the midst of the COVID-19-related collection pause, FSA cancelled its contracts with PCAs but did not transition servicing of defaulted student loan debt to a new set of contractors as planned. The Department of the Treasury’s (Treasury’s) Bureau of the Fiscal Service (Fiscal Service) provides centralized delinquent debt collection via its Cross-Servicing Program (CSP) for most other federal agencies. Fiscal Service and its contractors attempt to collect on many types of federal delinquent nontax debts and use similar tools as those FSA might use to collect on defaulted federal student loans. On March 19, 2026, ED and Treasury entered into an interagency agreement (Treasury-ED IAA)“to promote innovation and process improvements in pursuit of more effective federal student aid administration.” The IAA contemplates a three-phase approach to pursuing this objective. In Phase 1, Treasury is to assume responsibility for servicing ED’s defaulted federally held student loans through Fiscal Service’s CSP gradually, and FSA is to pay Fiscal Service fees relating to the cost ofits services. (The other two phases are not addressed herein.) As part of their rationale for entering into the IAA, ED and Treasury have stated that ED is “ill-equipped” to manage the student loan portfolio, whereas, in their view, Treasury has expertise in “managing highly complex financial and information technology systems” and in collecting on delinquent and defaulted debts for other federal agencies. Opponents of the effort argue that Treasury “lacks expertise in the highly unique and complex federal student loan system” and that Fiscal Service may not be adequately resourced for the transition. Available data indicate that should all defaulted federal student loans held by ED be referred to the CSP, Fiscal Service could see an increase of approximately 7.8 million debtors and about $179.1 billion in the dollar amount of debts for which it maybe responsible for servicing. While these increases are notable, the extent to which they may pose a challenge for Fiscal Service is unclear for several reasons, including that the IAA contemplates a graduated approach to referral of defaulted st

FAQs

What is the scope of the defaulted federal student loan portfolio managed by the Department of Education?

As of December 31, 2025, the Department of Education’s portfolio comprised loans of about 7.8 million borrowers owing $179 billion.

How did COVID-19-related policies affect debt collection for defaulted student loans?

The report states that the Office of Federal Student Aid and its contractors significantly decreased debt collection activities during COVID-19-related policies, and that, amid the pause, FSA canceled its contracts with private collection agencies without transitioning servicing to new contractors as planned.

What does Phase 1 of the Treasury-ED interagency agreement require?

Phase 1 contemplates that Treasury will gradually assume responsibility for servicing the Department of Education’s defaulted federally held student loans through the Fiscal Service’s Cross-Servicing Program, while FSA pays fees related to the cost of Treasury’s services.

Oct 15, 2026

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