Key Points
- Five senior Senate Democrats, led by Sen. Elizabeth Warren, are calling on Education Secretary Linda McMahon and Treasury Secretary Scott Bessent to rescind a new interagency agreement (IAA) that would transfer the administration of federal student loans from the Department of Education to the Treasury Department.
- The senators argue the transfer is illegal, citing a bipartisan Congressional directive stating the Department of Education has no authority to hand off its statutory responsibilities to other agencies.
- The three-phase IAA could eventually put Treasury in charge of the entire federal student loan portfolio, FAFSA administration, and financial aid distribution.
Five senior Senate Democrats sent a letter (PDF File) on April 1, 2026 to Education Secretary Linda McMahon and Treasury Secretary Scott Bessent demanding they immediately rescind the Trump administration’s plan to transfer federal student loan administration from the Department of Education (ED) to the Treasury Department.
The senators (Elizabeth Warren, Bernie Sanders, Ron Wyden, Patty Murray, and Tammy Baldwin) called the arrangement an “illegal scheme” that threatens to plunge millions of borrowers into further confusion.
The letter targets a recently announced interagency agreement (IAA) between ED and Treasury, signed on March 19, 2026. The agreement would shift ED’s core responsibilities for managing student loans and federal student aid to Treasury in three phases, starting with defaulted loan collections and potentially expanding to oversight of the entire federal student loan portfolio and FAFSA form.
“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,” the lawmakers wrote.
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What The Interagency Agreement Actually Does
The ED-Treasury IAA is structured in three phases:
- Phase 1 tasks Treasury with collecting on defaulted student loan debt and helping borrowers exit default through loan rehabilitation.
- Phase 2 envisions Treasury potentially managing the entire federal student loan portfolio, including servicing for borrowers in repayment.
- Phase 3 could hand Treasury the administration of the FAFSA form, financial aid eligibility determinations, and the distribution of aid like Pell Grants.
The lawmakers point out that this is ED’s third such interagency agreement since the passage of the Consolidated Appropriations Act of 2026.
Previous IAAs transferred career and technical education programs and adult education grant programs to the Department of Labor. Those earlier transfers have already resulted in over $1 million in extra program costs and weeks-long delays in grant disbursements, according to the letter.
The senators argue that Congress specifically rejected this approach.
The Joint Explanatory Statement accompanying the Consolidated Appropriations Act states that ED has no authority to “transfer its fundamental responsibilities under numerous authorizing and appropriations laws, including through procuring services from other Federal agencies.” The statement further warns that receiving agencies “do not have experience, expertise, or capacity to carry out these programs” and that the transfers will “create inefficiencies, result in additional costs to the American taxpayer, and cause delays.”
Cost Questions Go Unanswered
The senators also pressed both secretaries for basic cost information. ED has refused to provide Congress with estimated costs for any IAA beyond the initial career and technical education and adult education transfers. Those earlier transfers alone have added over $1 million in extra program costs and FSA’s operations are orders of magnitude larger.
The IAA itself acknowledges the cost uncertainty, stating that ED and Treasury will work with the Office of Management and Budget “to validate that funds are available and obligated” before starting work. The senators call this reckless, arguing that entering a transfer of this magnitude without any cost transparency puts taxpayers on the hook for an open-ended expense.
The questions asked include: How much will it cost? How many Treasury staff will be responsible? What efficiency analysis supports the move? Will Treasury maintain ED’s moratorium on forced collections? And how will Treasury’s performance be measured against ED’s?
The letter demands answers by April 15, 2026.
Treasury Track Record Raises Red Flags
Perhaps the most striking detail in the letter is a reference to a pilot study conducted during the Obama administration. Treasury’s Bureau of the Fiscal Service (BFS) was given responsibility for collections and loan rehabilitation for several thousand student loan borrowers in default. By the end of the trial, BFS had completed rehabilitations for just eight borrowers. ED, working with an equally sized comparison group, completed more than fifteen times as many rehabilitations.
The senators also note that Treasury’s capacity has shrunk since then. Mass firings at BFS last year eliminated over 160 employees, leaving the agency even less equipped to take on the complex work of student loan administration. Treasury itself has acknowledged that it “does not administer any financial assistance, loan, or loan guarantee programs to individuals or businesses” and does not service any federal loans.
Federal Student Aid (FSA), the office within ED that currently handles these responsibilities, is the department’s largest office with close to 800 employees. FSA manages multibillion-dollar loan servicing contracts and administers billions in student aid each year. Handing that workload to an agency with no relevant experience is, in the senators’ view, a recipe for disaster.
What This Means For Borrowers And Families
43 million Americans have federal student loan debt, and over 7 million are currently in default.
The senators warn that moving collections to Treasury could worsen an already bad default crisis.
The lawmakers argue the administration has made matters worse for borrowers through a series of actions: firing hundreds of FSA employees, replacing the SAVE repayment plan with the more expensive Repayment Assistance Plan (RAP), charging interest on loans in forbearance, and mass-rejecting hundreds of thousands of income-driven repayment applications.
If Treasury takes over and stumbles (as the pilot study suggests it might) borrowers in default could face longer wait times, less guidance on how to get back on track, and greater risk of aggressive collections from contractors unfamiliar with ED’s existing consumer protections.
The later phases of the IAA raise even bigger concerns. Administrative errors in FAFSA processing or financial aid distribution could delay or block access to Pell Grants and other aid for millions of students and families. The senators note that FSA’s responsibilities will now be split across two departments, creating more bureaucracy rather than less.
“Treasury’s lack of expertise in the federal student aid system could be disastrous,” the senators wrote, “as the federal student aid system is highly complex and administrative errors could endanger access to financial aid or statutory debt cancellation.”
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Editor: Colin Graves
Robert Farrington is the founder of The College Investor and is widely recognized as one of the nation’s leading voices on student loan debt and saving for college. He holds an MBA from UC San Diego Rady School of Management and has spent over 15 years researching, writing, and advising on student loans, 529 plans, financial aid programs, and saving and investing for young professionals.
Robert has been featured in the The New York Times, The Wall Street Journal, The Washington Post, NBC News, and Forbes, where he has been a regular personal finance contributor for over a decade. His work combines both professional expertise and personal experience – he successfully navigated his own student loan repayment journey and has helped thousands of readers do the same.
He is committed to making the intersection of personal finance and education transparent and accessible. You can learn more about Robert on the About Page or on his personal site RobertFarrington.com.