Contents

• 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
• Duration of and Modifications to the Treasury-ED IAA
• Implementation of Phase 1 of the Treasury-ED IAA
• Observations on Transitioning Servicing of Defaulted Federal Student Loans to Treasury
• Volume of Debts to Be Serviced
• Selected Aspects of Relevant Treasury Experience in Servicing Delinquent Debts

Summary

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 of its 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 ED-held student loans that are 180 days delinquent (the length of delinquency typically required for other federal agencies to refer loans to the CSP) be referred to the CSP, Fiscal Service may see an 85% increase in the number of delinquent debts and an almost 400% increase in the dollar amount of delinquent debts for which it may be 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 student loans to Treasury, which may enable Treasury to gradually gain experience in servicing defaulted student loans before increasing the scope of future operations.

Few evaluations of Treasury's collection of delinquent debts and the CSP are publicly available. A 2016 interim report for a pilot program between FSA and Fiscal Service, under which Fiscal Service serviced a sample of defaulted federal student loans, showed some indications that it was less successful than FSA-contracted PCAs in resolving or collecting on such debts. Report findings indicate that federal student loans are unlike other debts typically serviced by Fiscal Service and that Fiscal Service's general collection operations may not have been sufficiently tailored to address those unique products. Although Fiscal Service had planned some operational changes to improve its performance under the pilot program in light of the interim report's findings, the pilot was ended earlier than planned and any final results from program are unavailable.

Introduction

The U.S. Department of Education's (ED's) Office of Federal Student Aid (FSA) was established in 1998 pursuant to Section 141 of the Higher Education Act (HEA) and is a discrete management unit "responsible for managing the administrative and oversight functions" supporting HEA Title IV federal student aid programs, including the Pell Grant and the Direct Loan programs.¹ In FY2025, FSA oversaw the provision of approximately $133.1 billion in Title IV aid to approximately 9.2 million students attending institutions of higher education (IHEs).² The Direct Loan Program represents the single largest source of federal financial assistance to support students' postsecondary educational pursuits. As of December 31, 2025, approximately $1.7 trillion in HEA Title IV student loans borrowed by about 45.3 million individuals were outstanding.³ ED's portfolio of defaulted federal student loans comprises loans of about 7.8 million borrowers totaling $179 billion.⁴

On March 19, 2026, ED and the U.S. Department of the Treasury (Treasury) entered into an interagency agreement (Treasury-ED IAA)⁵ under which Treasury is to assume responsibility for or review tasks required to carry out aspects of the HEA Title IV federal student financial aid programs on an unspecified timeline. ED and Treasury entered into the IAA "to promote innovation and process improvements in pursuit of more effective federal student aid administration."⁶ The Treasury-ED IAA contemplates a three-phase approach to pursuing these objectives.

• Phase 1: Treasury is to service FSA's defaulted federally held student loans through its Cross-Servicing Program (CSP, discussed later in this report's "Fiscal Service's Cross-Servicing Program" section).
• Phase 2: Treasury is to "assume responsibility for administrative operations for servicing [FSA's] non-defaulted debt, to the extent practicable, following Treasury's assessment of the portfolio and its operations."⁷
• Phase 3: Treasury is to review the programmatic and policy requirements governing students' eligibility for federal financial assistance, including administration of the Free Application for Federal Student Aid (FAFSA) and IHEs' eligibility to participate in HEA Title IV programs.

This report focuses on Phase 1 of the Treasury-ED IAA. It begins by describing FSA's current procedures for servicing and collecting on defaulted student loans. The report then describes the details of Phase 1 delineated in the Treasury-ED IAA. It concludes with some initial observations and considerations relating to transitioning defaulted federal student loans servicing to Treasury as envisioned in Phase 1. Descriptions and analyses of FSA and Treasury functions in this report are based on publicly available information.

FSA Servicing of Defaulted Student Loans

FSA is the primary entity that administers the Direct Loan program (the largest of the federal student loan programs). FSA also administers aspects of the Federal Family Education Loan (FFEL) program, the Perkins Loan program, and the Health Education Assistance Loan (HEAL) program.⁸

The Debt Collection Improvement Act (DCIA) generally requires federal agencies to transfer nontax debts that are 180 days or more delinquent to Treasury's Bureau of the Fiscal Service (Fiscal Service) for centralized debt collection (i.e., referral to Fiscal Service's CSP).⁹ Since 2001, the Secretary of the Treasury has granted FSA an exemption from this requirement.¹⁰ This exemption was granted pursuant to Treasury-established criteria for evaluating an exemption request, which considered whether (1) the requested exemption was the best means to protect the federal government's financial interest, (2) transfer of the debt to Treasury would interfere with the federal student loan programs' goals, and (3) the exemption would be consistent with the purposes of the DCIA.¹¹ Thus, FSA is currently responsible for collecting delinquent and defaulted federal student loan debt assigned to or held by ED.

In general, when a federal student loan borrower has not made loan payments for 270 days after the payment due date, the borrower is considered in default on their loan(s).¹² Borrowers who default on their federal student loans may be subject to various consequences, including voluntary and involuntary debt collection. Voluntary debt collection generally refers to processes through which a borrower agrees to make payments on their defaulted loan and includes default resolution through means such as loan rehabilitation, loan consolidation, or payment in full.¹³ Involuntary debt collection refers to the federal government taking action to collect payment from a borrower without the borrower's consent through means such as administrative wage garnishment (AWG),¹⁴ referral to the Treasury Offset Program (TOP)—administered by Fiscal Service¹⁵—and referral to the U.S. Department of Justice (DOJ) for civil litigation.

Most collection activities on defaulted ED-held student loans, including AWG and referral to TOP, were suspended from March 2020 to the present because of policies implemented in response to and following the COVID-19 pandemic.¹⁶ Prior to March 2020, ED's servicing of defaulted student loans generally worked in the following manner.¹⁷

• 1. Upon default (at least 270 days of a borrower not making scheduled loan payments), a student loan account would remain with a servicer for about 90 days. During this time, servicers would perform some debt collection functions, such as sending demand letters, notifying borrowers when they had defaulted on their loans, performing skip-tracing activities, and attempting to enter into repayment arrangements for defaulted loans.¹⁸
• 2. If a loan was more than 360 days delinquent, the account would be transferred from the loan servicer to FSA's Default Resolution Group (DRG), which would provide options for borrowers to resolve their default status (e.g., loan rehabilitation, consolidation). The DRG operates and maintains the Debt Management and Collection System (DMCS), the collection platform used to manage defaulted ED-held student loans. Both the DRG and DMCS are managed by an FSA contractor. If the default was resolved, the loan would be assigned by FSA to a servicer for loan servicing.
• 3. If the default was not resolved within 60 days of being transferred to the DRG (i.e., was delinquent for 420 days), the loan would typically be assigned to an FSA-contracted private collection agency (PCA). A PCA would first attempt to determine whether the loan was eligible for an administrative resolution (e.g., determine whether the loan was eligible for discharge due to the borrower meeting loan forgiveness or discharge requirements). If this option was unavailable, a PCA would utilize voluntary collection options to attempt to resolve the default. If those options did not work, the PCA could seek to collect on the defaulted loan by using involuntary collection methods such as AWG, referring the loan for federal offset to TOP, or recommending litigation. PCAs also performed other tasks, such as skip-tracing activities.
• In cases where a loan remained with the DRG and was not assigned to a PCA, the DRG would perform many of the debt collection activities typically performed by PCAs.¹⁹
• The DMCS processed all payments made by borrowers on their defaulted loans through Treasury's National Payment Center, regardless of whether a loan had been assigned to a PCA. It also reported loan statuses to the National Student Loan Data System and to consumer reporting agencies.²⁰
• If a default was resolved, FSA would assign the loan to a servicer for loan servicing.
• 4. If a default was not resolved after placement with a PCA, FSA could require the PCA to return the loan to the DRG for transfer to a new PCA.

In November 2021, in the midst of the COVID-19-related collection pause, FSA cancelled its contracts with PCAs as "one part of a long-term strategy to improve defaulted federal student loan collections."²¹ FSA stated that in the short-term following the cancellation of the PCA contracts, it would utilize the DRG and DMCS to manage defaulted student loans.²² In the long-term, FSA planned to, but did not, transition defaulted debt servicing work to a new set of contractors.²³ Defaulted debt servicing has since remained with DRG.²⁴

Table 1 details the amount of defaulted federally held student loans FSA and its contractors collected or resolved in FY2019 (the last full fiscal year prior to the beginning of the COVID-19-related student loan debt collection pause) and in FY2025 (the first fiscal year following the end of the COVID 19-related policies and subsequent policies to curtail student loan debt collections) and the percent change, by collection or resolution method.

As shown in Table 1, the dollar amount of defaulted student loans collected or resolved by FSA and its contractors decreased markedly from FY2019 to FY2025. Some of these decreases are likely the result of the various COVID-19-related policy changes (e.g., COVID-19 debt collection pause) and subsequent ED policy changes, such as implementation of the "on-ramp" to repayment policy²⁵ and the continued cessation of AWG and TOP.²⁶ From these data alone, it is not readily apparent why resolution through loan consolidation saw a larger decrease than resolution through loan rehabilitation. Some of the ED policies that may have led to decreased amounts of defaulted student loan collections, such as cessation of the use of AWG and TOP, remain in place to date.

As a point of reference, on September 30, 2019 (i.e., the end of FY2019), $167.7 billion in federally held student loans were in default; on September 30, 2025, that figure was $117.3 billion.²⁷ As of December 31, 2025, the amount of federally held student loans that were in default had increased to $179 billion.²⁸

Fiscal Service's Cross-Servicing Program

The DCIA generally requires federal agencies to transfer nontax debts that are 180 days or more delinquent to Fiscal Service for centralized debt collection via the CSP.²⁹ As such, Fiscal Service attempts to collect on many types of federal delinquent nontax debt—including fines, overpayments, other federal direct loans, and guaranteed loans—referred from various federal agencies through actions similar to those FSA might use to collect on defaulted federal student loans. Through the CSP, Fiscal Service may use collections tools such as sending demand letters, negotiating payment agreements, reporting delinquent debt to consumer reporting agencies, garnishing wages, offsetting eligible federal payments through TOP, and referring debts to DOJ for litigation.³⁰ Fiscal Service may internally service the delinquent debt or refer the debt to a PCA for servicing.

PCAs that service delinquent debts referred to them via the CSP may take a variety of steps to collect on the debt, including skip-tracing, sending demand letters, negotiating payment plans, determining whether a debt is eligible for an administrative resolution, and initiating AWG.³¹ If one PCA is unable to collect or resolve a debt, Fiscal Service may refer the debt to another PCA, attempt to collect the debt internally, suspend collection, or return the debt to the agency that originally referred it to the CSP.³² These tasks are similar to those that FSA-contracted PCAs might have taken to collect on defaulted federal student loan debt.

Fiscal Service currently contracts with the following PCAs:

• The CBE Group, Inc.,
• ConServe, Inc.,
• Pioneer Credit Recovery, Inc.,
• Coast Professional, Inc., and
• Transworld Systems, Inc.³³

Of these, Conserve, Inc.; Pioneer Credit Recovery, Inc.; and Coast Professional, Inc. were previously FSA-contracted PCAs.³⁴

Before referring delinquent debt to the CSP, an agency must take a number of steps, including certifying that the agency is transferring to the CSP valid and legally enforceable debt, informing the CSP of what tools it may use to collect the debt, making a written demand to the debtor, and providing the debtor with any required due process.³⁵

The Treasury-ED Interagency Agreement

As described earlier, the Treasury-ED IAA contemplates a three-phase approach under which Treasury is to (1) service FSA's defaulted federally held student loans through Fiscal Service's CSP; (2) "assume responsibility for administrative operations for servicing [FSA's] non-defaulted debt, to the extent practicable, following Treasury's assessment of the portfolio and its operations"; and (3) review the programmatic and policy requirements governing students' eligibility for federal financial assistance, including administration of the FAFSA, and IHEs' eligibility to participate in the HEA Title IV programs.³⁶

In a press release about the Treasury-ED IAA, Treasury and ED stated that ED is "ill-equipped" to manage the size and complexity of the federal student loan portfolio and that the partnership between Treasury and ED will "draw on Treasury's expertise in managing highly complex financial and information technology systems and in collecting delinquent and defaulted debt for federal agencies."³⁷

The agencies stated that Treasury was selected for the partnership because ED and Treasury have a history of partnership in managing the HEA Title IV programs.³⁸ Aspects of this history include

• Treasury disburses funds to ED for the making of federal student loans;
• ED uses TOP for involuntary debt collections;
• ED leverages Treasury data for aspects of student aid administration (e.g., income verification for income-driven repayment plans and the FAFSA);
• both agencies have contracted with an overlapping set of PCAs; and
• Treasury chairs the Financial Literacy and Education Commission, through which ED educates borrowers on student loan debt.³⁹

Phase 1 of the Treasury-ED IAA

Broadly speaking, in Phase 1, Treasury is to assume responsibility for servicing FSA's defaulted federally held student loans in exchange for FSA paying it a fee for the costs Treasury incurs. According to the IAA, Treasury is to develop a plan, in coordination with ED, to refer all eligible federally held defaulted student loans to the CSP.⁴⁰ The plan is to "take into consideration operational capacities of the [DRG], existing [ED] contracts and resources, and Fiscal Service, including whether Fiscal Service has procured the services of private collection agencies for the student loan portfolio."⁴¹ ED is to "fully support Treasury's efforts to gain familiarity with the defaulted federal student loan portfolio and the associated servicing requirements."⁴²

Additionally, "to the extent allowed by law," Treasury is to assume operational responsibilities for FSA's DRG and is to "commit resources to provide oversight, direction, and planning as quickly as practicable."⁴³ DRG is to refer defaulted federally held student loans to the CSP.

The IAA contemplates a tiered approach to the referral of defaulted federally held student loan debt to the CSP. It states that Fiscal Service and FSA will coordinate "to determine whether any student loan debts can be immediately referred to Cross-Servicing on a pilot basis" and that Fiscal Service and the DRG will coordinate to develop a plan for the DRG to refer all eligible debt to the CSP.⁴⁴

In the IAA, ED acknowledges that Treasury "intends to revoke" FSA's existing exemption from referral of defaulted federally held student loan debts to the CSP, which has been in place since 2001.⁴⁵

Responsibilities to Be Performed by Each Party Under Phase 1

The Treasury-ED IAA specifies that, subject to available appropriations, ED will make payments to Treasury to cover the costs of Treasury's services under the IAA. The IAA also contains a table delineating how Fiscal Service, FSA, and the DRG will "share collection responsibilities" and states that Fiscal Service and the DRG will work to identify a "detailed workflow to ensure a robust understanding of the roles and responsibilities of each party."⁴⁶ Example responsibilities to be assigned to Fiscal Service, FSA, and the DRG include the following:

• Fiscal Service is to (1) develop form letters and send written communications to defaulted student loan borrowers; (2) refer student loan debts referred to the CSP to PCAs, to TOP, and to DOJ for litigation; (3) advise borrowers who believe they may be eligible for loan forgiveness or a defense to repayment⁴⁷; (4) work with borrowers to develop payment plans for the purposes of resolving the default (e.g., for the purpose of loan rehabilitation); and (5) initiate AWG.
• Fiscal Service may perform these tasks through its employees, through one or more contractors, through agreements with other federal agencies or Treasury offices, or through one or more fiscal agents.⁴⁸
• FSA is to (1) along with Fiscal Service, "address litigation resulting from student loan collection efforts"; (2) respond to congressional, media, and Freedom of Information Act requests; and (3) pay Fiscal Service fees relating to the cost of its services.⁴⁹
• The DRG, under Treasury's oversight, is to (1) "establish the existence of a debt" under 31 U.S.C. §3701(b)(1); (2) conduct skip-tracing activities; (3) provide borrowers with general due process notifications; (4) refer appropriate student loans to the CSP; (5) process, adjudicate, and approve or reject a borrower's rehabilitation application as well as approve proposed repayment agreements; and (6) conduct credit bureau reporting.

Funding of Phase 1 Under the Treasury-ED IAA

FSA incurs various costs in its efforts to collect on defaulted student loan debt. These costs can include, for example, fees paid to Fiscal Service for TOP and the costs of FSA employees and contractors. The HEA authorizes FSA to charge federal student loan borrowers collection costs associated with their defaulted loans.⁵⁰

The IAA states that FSA will authorize Fiscal Service to "assess as costs on student loan debtors that have been referred to the [CSP] any reasonable amounts that Fiscal Services charges FSA."⁵¹ If collection costs exceed amounts that FSA "would like to have assessed on student loan debtors," FSA is to provide instructions to Fiscal Service and is to be responsible for covering all collection costs, subject to appropriations.⁵² The IAA states that Treasury will not commence or continue work under the IAA "in the absence of appropriate funding."⁵³

Duration of and Modifications to the Treasury-ED IAA

The IAA stipulates that it is effective as of the date of the last signature of the agencies' representatives and until terminated by the parties; it does not set forth a specific timeline for when any of the phases, including Phase 1, are to be implemented.⁵⁴

Finally, the IAA states that Treasury and ED may modify the terms of the IAA, so long as the modifications are in writing and agreed to by both agencies.⁵⁵

Implementation of Phase 1 of the Treasury-ED IAA

The timing, steps, and resources needed to implement Phase 1 of the IAA are unspecified. However, ED and Treasury have taken some steps to define these aspects of Phase 1. On April 3, 2026, ED and Treasury signed a memorandum of understanding under which seven ED employees are to be detailed to Treasury, and two Treasury employees are to be detailed to ED.⁵⁶ The seven ED employees to be detailed to Treasury are to manage the DRG, and their responsibilities during their detail include "continuing to manage day-to-day operations of FSA's defaulted loan functions, as well as implementing a scaled transition of servicing [FSA's] defaulted loans through Treasury's Cross-Servicing program."⁵⁷ The responsibilities of the Treasury employees to be detailed to ED include "supporting planning for migrating responsibilities to Treasury as appropriate and allowed by law."⁵⁸

Additionally, on March 20, 2026, Fiscal Service published a request for information to obtain industry input on a draft solicitation for so-called "default resolution agent" services to support Fiscal Service's servicing of defaulted federal student loans.⁵⁹ Items on which Fiscal Service sought industry input include

• which potential contract bidders may be interested in and capable of servicing defaulted federal student loans (e.g., sending demand letters, performing skip-tracing, negotiating loan rehabilitation agreements, initiating AWG);
• factors and suggestions Fiscal Service might consider in establishing a compensation structure; and
• "insights related to defaulted student loan debt collection" that could be shared for consideration as Fiscal Service prepares its solicitation for default resolution agent services.⁶⁰

The deadline for submitting responses was April 21, 2026.

Observations on Transitioning Servicing of Defaulted Federal Student Loans to Treasury

ED and Treasury entered into the IAA "to promote innovation and process improvements in pursuit of more effective federal student aid administration."⁶¹ While the Administration maintains that Treasury is "well positioned to provide operational support" to ED's management of the HEA Title IV federal student aid programs,⁶² some 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 staffed for the transition.⁶³

This section provides some initial observations and issues Congress may consider regarding a transfer of defaulted federal student loan servicing to Treasury. In doing so, this section explores two factors: the potential volume of defaulted student loan debts to be serviced by Treasury and selected aspects of relevant Treasury experience in servicing delinquent debts. The textbox, below, summarizes some additional factors that might impact federal agencies, including Fiscal Service's capacity to service defaulted federal student loans. These factors are then discussed in more detail with respect to the loan volume to be serviced and Treasury's previous experience in servicing defaulted federal student loans. This section does not attempt to compare and contrast Treasury's capacity to service defaulted federal student loans with ED's.

Volume of Debts to Be Serviced

One way to conceptualize Treasury's potential capacity to service defaulted federal student loans is to consider whether the transfer of such functions from ED to Treasury may significantly increase the volume of loans Fiscal Service may be tasked with servicing and, if so, whether such an increase might result in a larger workload for Fiscal Service. Concerns might be raised that such increases may strain Fiscal Service's current infrastructure and systems and potentially require additional staff or resources to meet an increased workload. Such concerns may be based in part on the approximately 40% reduction in the number of Fiscal Service employees that occurred between September 2024 and February 2026.⁶⁴ Indications that Fiscal Service may plan to outsource certain aspects of its CSP functions might be a mitigating factor of such concerns.⁶⁵

The Treasury Report on Receivables and Debt Collection Activities (TROR) is "the federal government's primary means for collecting data on the status" of delinquent and nondelinquent debt owed to the United States.⁶⁶ Federal agencies are required to report a variety of data to Treasury to facilitate production of the TROR, including, for example, the number and dollar amount of debts owed to the agency, the status of such debts (e.g., whether they are delinquent and by how many days), and whether such debts are exempted from referral to the CSP.

Table 2 shows the number and dollar amount of federal nontax debts referred to Treasury (or a designated debt collection center)⁶⁷ for cross-servicing and the number and dollar amount of potentially eligible (generally, legally enforceable debt that is 180 days delinquent) loan debts attributed to ED that are exempted from the CSP by Treasury.

Phase 1 of the Treasury-ED IAA contemplates ED referring defaulted FSA federally held student loans to Treasury for cross-servicing. In general, federal student loans are considered to be in default after 270 days of nonpayment.⁶⁸ Thus, the estimates presented in Table 2 likely overestimate the number and dollar amount of loans that could be transferred to Treasury for cross-servicing in Phase 1 of the IAA, as they include all debts that are at least 180 days delinquent.⁶⁹ That is, the column labeled "Department of Education Loan Debt Exempted from Cross-Servicing" in Table 2 represents a potential upper limit of the number of amount of debts ED might immediately assign to Treasury for cross-servicing. Additionally, the estimates presented in Table 2 may include debts owed under credit programs operated by ED other than HEA Title IV student loan programs; however, HEA Title IV student loans likely comprise the majority of the number and dollar amount of ED direct loans and defaulted guaranteed loans that are exempted from referral to the CSP.⁷⁰

Table 2 indicates that should all of FSA's Direct Loans that are 180 days delinquent and federally held defaulted guaranteed student loans be referred to the CSP, Fiscal Service could see an increase of approximately 36 million of delinquent debts and about $237 million in the dollar amount of delinquent debts for which it may be responsible for servicing. While this would represent a large increase in the number and dollar amount of debts that may be referred to the CSP, it is unclear the extent to which such an increase could pose challenges for Fiscal Service.

Additionally, the TROR provides information on the number of discrete debts eligible for referral to the CSP but does not contain information on the number of individuals who owe such debts. Thus, it is possible that a single individual could have multiple delinquent debts, owed to one or more federal agencies, referred to Treasury for cross-servicing. Student loan borrowers often borrow multiple loans over the course of their postsecondary education (e.g., an individual may borrow one or more federal student loans in each academic year of their postsecondary education); thus, the number of ED debts exempted from cross-servicing does not represent the number of individuals whose debts are exempted from cross-servicing.⁷¹

The number of individuals whose defaulted debts would be serviced by Treasury may be an important factor in evaluating whether increased debt referrals from ED might strain Treasury's capacity. Some tasks associated with servicing of defaulted debts do not necessarily require increased work as the number and dollar amount of an individual's defaulted student loans increase. For example, in skip-tracing, a creditor or its agent attempts to locate a borrower whose contact information is no longer current. This could include contacting individuals identified in the borrower's loan file and using national change of address search services. The creditor need not necessarily repeat skip-tracing steps for each individual loan owed by the same borrower.

Complexity of and agency experience with the terms and conditions of the debt to be collected also may impact Treasury's capacity to service defaulted federal student loans, regardless of loan volume to be serviced. Some observers have argued that Treasury has experience with involuntary collection tactics, such as TOP, but is not well-versed in the resolution options available for federal student loans, such as loan rehabilitation.⁷² Such a lack of expertise may make it difficult for Treasury to efficiently and accurately service defaulted federal student loans, though ED has indicated that it is working with Treasury to automate resolution procedures, which may mitigate efficiency concerns.⁷³

The Treasury-ED IAA also contemplates a graduated approach to the referral of defaulted federally held student loan debt to Fiscal Service for cross-servicing. While the IAA does not provide details on this approach (e.g., it does not specify which types of federally held student loans or how many might be initially transferred to Treasury for cross-servicing), a phased approach to referral may enable Treasury to gradually gain experience in servicing defaulted federally held student loans before increasing the scope of future operations. Such an approach, as opposed to referring all defaulted federal student loans to Treasury at once, may position Treasury for greater success in servicing defaulted federal student loans.

Selected Aspects of Relevant Treasury Experience in Servicing Delinquent Debts

Few evaluations of Treasury's collection of delinquent debts and the CSP are publicly available.⁷⁴ However, one such evaluation is directly relevant to Treasury's potential capabilities to service defaulted federal student loan debt.

In February 2015, Fiscal Service and FSA initiated a planned two-year pilot program to give Fiscal Service direct experience in servicing defaulted federal student loans usually serviced by FSA via its PCAs.⁷⁵ Under the pilot program, FSA referred to Fiscal Service for collection a generally representative sample of 16,242 defaulted federal student loans representing 5,729 borrowers with a balance of about $80 million. Fiscal Service followed the processes and guidelines provided by FSA as if Fiscal Service were an FSA-contracted PCA and modified its processes to service the loans.

In 2016, after one year of the pilot program, Treasury published a report with initial findings. The findings showed that Fiscal Service was less successful than FSA-contracted PCAs in resolving or collecting on student loan debts. For example, Fiscal Service resolved 4.14% of loans referred to it, whereas FSA-contracted PCAs resolved 5.46% of loans in the study's control group.⁷⁶ The FSA-contracted PCAs had higher collection rates and recovery rates across all metrics evaluated in the report.⁷⁷

Fiscal Service stated that it believed the differences in collection and recovery rates between the pilot and the control groups were driven by a number of factors, including the following:

• Collections timing. Fiscal Service "proceeded relatively slowly" through collection procedures, choosing to postpone the use of AWG for most borrowers for the first 11 months of the pilot program. It observed that issuance of AWG notice letters resulted in an increase in the volume of calls from borrowers to inquire about ways to avoid AWG and seemed to hypothesize that initiating AWG sooner in the pilot program might have resulted in higher collection and recovery rates.
• Call frequency. Fiscal Service called borrowers in the pilot group no more than once per week, which was "likely less frequent than the standard practice of [FSA-contracted] PCAs," but which allowed Fiscal Service's call center agents to focus on borrower engagement and follow-up.
• Different and additional collection tools used by PCAs. FSA-contracted PCAs used customized tools, including different "systems designed to manage the … borrower relationship required to complete the rehabilitation program and customized digital capabilities such as self-service portals" that supported student loan collections. Fiscal Service did not use such tools, as it had not needed them in the CSP, and the cost and time required to develop such tools were prohibitive for purposes of the pilot program.⁷⁸

Fiscal Service observed that several other factors impact defaulted student loan collection compared with other federal debt collection. For example, Fiscal Service found that student loan borrowers were difficult to engage using Fiscal Service's traditional contact methods—U.S. mail and telephone calls—as student loan borrowers provide the federal government with their contact information at the time they apply for a loan. In some instances, the contact information had changed, but borrowers had not provided updated information to FSA by the time a borrower's loan defaulted. Fiscal Service also observed that the number and complexity of available voluntary debt resolution options (e.g., rehabilitation, consolidation) resulted in its calls to student loan borrowers being "materially longer" compared with calls regarding the other debts it services, that the student loan rehabilitation process is "difficult to complete," and that student loan borrowers faced numerous challenges in transitioning from default to active repayment.⁷⁹

Taken together, these initial findings from the pilot program may indicate that federal student loans are unlike other debts typically serviced by Fiscal Service, that student loan borrowers may exhibit unique characteristics compared with other federal debtors, and that, at the time, Fiscal Service's general debt collection operations may not have been sufficiently tailored to address these unique products and borrowers.

As described in its initial findings report, after noting some of the issues confronting Fiscal Service in its servicing of defaulted federal student loans, Fiscal Service made or planned some operational changes to improve its performance. Although the pilot program was to end in December 2017, it concluded in October 2017, "due to Treasury implementing a new system."⁸⁰ It is unclear whether a final report on the pilot program was completed; thus, final results from the program and information on Fiscal Service's operational changes in light of their initial findings are unavailable.

Fiscal Service might leverage this previous experience and lessons learned to tailor its debt collection activities to the unique issues posed by the federal student loan portfolio. Doing so may result in its resolving or collecting defaulted federal student loans at a higher rate than under the pilot program. Additionally, student loan terms and conditions have changed since the pilot program in 2015, which may impact Treasury's servicing of defaulted federal student loans. For example, effective July 1, 2027, federal student loan borrowers would be permitted to rehabilitate their loans twice instead of once. The extended availability of this option may enable some borrowers to resolve their defaulted student loans more easily than before. Other developments in federal student loans may have the opposite effect. For example, following the years-long COVID-19-related policies and subsequent policies to curtail debt collections, some borrowers may have become disconnected from the student loan system, which may make engaging with them difficult.

Footnotes