Why It’s Good News That Student Loans Are Moving From Education to Treasury

The Department of the Treasury announced Thursday that it will be taking over major aspects of administering the $1.7 trillion student loan portfolio from the Department of Education. This is good news. Most of the benefits from the shift derive from differences in the core competencies of the two departments. Treasury’s core focus is on finance, in particular collecting revenue in the form of taxes and making payments. Education’s focus is not finance, but rather education. Student loans are a much more natural fit for Treasury than for Education, and there are three groups that will benefit the most from this change: students, taxpayers and fans of federalism.

Students will benefit from a more streamlined aid application and loan repayment process. The aid application process relies on tax data to determine aid eligibility, and the new Repayment Assistance Plan (RAP) relies on adjusted gross income (AGI) to determine monthly payments. Education has direct access to none of this information, whereas Treasury, which houses the Internal Revenue Service, does. With some legislative updating, it is possible to transition the aid application process from the Free Application for Federal Student Aid to a simple checkbox on a student’s tax forms, which would constitute a radical simplification of the aid-application process.

Loan repayment mistakes should also be more easily detected and remedied by Treasury. For example, Treasury will have one estimate of AGI from tax withholding and another from payments under RAP and could notify borrowers of large discrepancies.

Taxpayers will also benefit from Treasury taking over the student loan portfolio. Treasury takes collections much more seriously, enough so that people often joke that the only two certainties in life are death and taxes. In contrast, Education’s approach to collecting loan repayments resembles that of an overindulgent parent who doesn’t care if they are repaid. Recall that student loan payments were paused for 3.5 years after the start of the COVID pandemic. Taxes were not paused. Moving student loans to Treasury should increase repayment, reducing taxpayer losses on student loans, which are currently projected to lose 3.9 cents for every dollar lent.

Treasury can also be expected to provide more accurate and useful information on the student loan portfolio. The Government Accountability Office documented in a 2022 report that the Education Department underestimated losses on student loans for the prior 25 years. Education estimated that student loans would generate a profit of $114 billion over those 25 years, but as of fiscal year 2021 they were expected to generate losses of $197 billion. This is a gap of $311 billion—and although GAO found that 39 percent of this difference was attributable to legislative and administrative changes in the loan program, which the department should not have been expected to predict, the remaining $189 billion gap reflected the Education Department’s underestimations.

The other group that will benefit from moving student loans from Education to Treasury is made up of proponents of federalism. The move will shift perhaps the largest budgetary and staffing responsibility of the Department of Education, which will make it much easier to close.

Shutting down the department would be welcome news for several reasons, including that the Constitution authorizes no federal role in education. Closing the department would also reduce the culture wars. Many on the right were enraged by Education’s (real and perceived) politicized moves under the Biden administration, and many on the left are enraged by the Trump administration’s (real and perceived) politicized moves. While some advocates on each side are content with wild swings in policy until their own side emerges with a permanent victory, they are delusional. There never have been and never will be permanent victories. The better approach is to only allow your side the power that you would be comfortable placing in the hands of your political opponents.

In the education context, that means letting California be California and letting Florida be Florida. If one approach is clearly better, that will become clearer over time and citizens in the various states will insist upon changes. It could also be the case that both approaches have various strengths and weaknesses that appeal to different subsets of the population and both approaches persist indefinitely. That’s fine, too, and is the underlying beauty of the decentralized approach to education inherent in federalism and mandated by the Constitution. But this decentralized approach to education, where states are left alone to experiment and find the approaches that work well for their citizens, will be under perpetual threat so long as there is a centralized Department of Education threatening to impose its preferred policies everywhere. To avoid this fate, we should seek to reduce the federal role in education, culminating in shutting down the Department of Education. As this move demonstrates, the worthwhile tasks the department is currently undertaking can be reassigned to other departments and agencies.