Education Dept transfers $1.7T student loan portfolio to Treasury

Congress created the Department of Education in 1979 to centralize federal education policy, funding, and the administration of student financial aid. At its core is the Office of Federal Student Aid, which became the government's largest consumer financial institution, overseeing $1.7 trillion in outstanding loans held by more than 43 million borrowers. FSA also administers the Free Application for Federal Student Aid, which more than 17 million students fill out each year, and the Pell Grant program, which provides non-repayable awards to more than six million low-income students annually.

The Trump administration has moved to dismantle the Education Department since January 2025. Secretary Linda McMahon announced plans to redistribute the department's programs to other federal agencies through interagency agreements rather than seek a congressional vote to formally abolish it, which would require legislation.

On March 19, 2026, the Education Department and Treasury announced a Federal Student Assistance Partnership, a three-phase transfer of FSA's core functions to Treasury. Phase one immediately moves responsibility for collecting on the 9.2 million borrowers in default, a function Treasury held in the past but ceded to Education decades ago. An additional 2.4 million borrowers in late-stage delinquency will also shift to Treasury's authority.

Phase two will transfer servicing of all non-defaulted federal student loans to Treasury. Phase three will hand over FAFSA administration, Pell grant management, and institutional eligibility oversight for all federal student aid programs. The agreement calls these transfers effective to the extent practicable and permitted by law, language that legal scholars and Democratic lawmakers say obscures what the administration is actually authorized to do.

The March 19 deal is the 10th interagency agreement the Education Department has signed since early 2025 to redistribute its functions. Previous agreements moved career and technical education grants to Labor, school safety and mental health grants to HHS, foreign gift tracking for higher education to the State Department, and teacher training programs to other agencies. The administration has framed each transfer as an efficiency improvement; critics say it is a deliberate strategy to hollow out the department without a vote of Congress.

Several Democratic senators wrote to McMahon in February 2026 demanding she halt the transfers and explain the legal basis. McMahon has not publicly responded to those demands. Senate Minority Leader Chuck Schumer said the transfers are unconstitutional and that Congress, not the executive branch, holds the authority to dissolve departments it created by statute.

The legal authority for the transfers is contested. The Education Department's press release cited the FSA's Performance-Based Organization legislation and the Higher Education Act as authorizing the partnership, but those statutes don't expressly permit moving FSA's core functions to a different department. The administration has not sought an opinion from the Office of Legal Counsel or released any formal legal analysis supporting the transfers.

No court has yet blocked any of the 10 interagency agreements. Advocates have focused their litigation on grant cancellations and program cuts rather than the structural transfers, leaving the legality of the dismantling largely untested in court as of March 2026.

The Education Department's workforce dropped from more than 1,300 employees in early 2025 to fewer than 450 by March 2026, following the mass terminations and voluntary departures triggered by the department's announced dissolution. About 60 employees have been placed on detail at the Labor Department; a handful more are at HHS. Senate Democratic staff say the agencies inheriting Education programs lack the capacity, systems, and institutional expertise to manage the portfolios they are receiving.

FSA staff members who remain say the office is operating well below the level needed to handle 43 million borrower accounts, respond to servicer questions, investigate fraud, and process forgiveness applications. The risk of servicer errors and delayed borrower communications increases as the transition proceeds with a reduced workforce.

Treasury will collect on defaulted loans using the Treasury Offset Program, which can automatically seize tax refunds, Social Security payments, and federal wages to recover delinquent debt without a court order. The Education Department had relied more heavily on income-driven repayment plans and borrower rehabilitation programs to manage defaults with more flexibility. Borrower advocates say the shift to Treasury collection will result in more aggressive garnishment actions on low-income borrowers, veterans, and retirees on fixed incomes who defaulted during the pandemic payment pause.

Global Refuge and the National Consumer Law Center have both warned that borrowers in default who are currently negotiating rehabilitation plans or IDR enrollment may have their accounts transferred mid-process, disrupting those arrangements without adequate notice.

The transfer accelerates a broader dismantling of the Education Department that McMahon first announced in March 2025. Bloomberg's interactive tracker documents 10 interagency agreements redistributing functions across 12 months. Civil rights advocates warn the transfers have moved programs without their associated enforcement authority. The department has also cut its Title VI and Title IX enforcement offices by more than 70%, reducing investigations into discrimination at schools and colleges that receive federal funding.

Congress created the Education Department by statute in 1979 with the Department of Education Organization Act. Formally abolishing it would require Congress to repeal that law. The Trump administration's strategy of transferring programs through interagency agreements is untested as a method of effectively shutting down a Cabinet department. If it succeeds without legal challenge, it could serve as a blueprint for dismantling other agencies without congressional votes.