The Treasury Department begins receiving federal student loans from the Department of Education

WASHINGTON (AP) — The U.S. Department of Education is turning over part of its student loan portfolio to the Treasury Department, a first step toward eliminating management of all student loans as Trump administration officials dismantle the federal education agency.

Under an agreement announced Thursday, the Treasury Department will take over administration of student loans that borrowers are in default, meaning they are months behind on payments. These loans are worth about $180 billion, or 11% of the government’s $1.7 trillion student loan portfolio.

Read more: If you have federal student loan debt, here’s what experts want you to know

Ultimately, the Treasury Department will assume responsibility for all student loans, according to the agreement. The second phase states, without a time frame, that Treasury will “assume operational responsibility” for non-performing loans, “to the extent practicable.”

The administration says borrowers don’t need to do anything as the change passes. They will continue to work with the same loan servicer and repay their loans in the same way.

The 17-page agreement outlines a stunning reorganization of the nation’s federal student loan programs, which the Education Department has overseen since its creation more than 40 years ago.

The agreement “represents an intentional and historic step toward dismantling the federal education bureaucracy and significantly improving the administration of federal student aid programs,” Education Secretary Linda McMahon said in a statement.

In justifying the change, Trump officials said the Education Department was “ill-equipped” to handle such a large portfolio of loans. They blamed the Biden administration for focusing on efforts to cancel student loans rather than helping borrowers get back on track with payments. Officials cited recent data showing that less than half of borrowers are currently making their loan payments, with nearly a quarter of them defaulting.

The agreement is likely to raise legal challenges. Some opponents point out that federal law requires the Department of Education to oversee student loans. Trump officials believe they have found a workaround by framing it as a partnership, with some components, including the policies underpinning student loans, remaining at the Education Department.

The move comes as part of President Donald Trump’s campaign to close the Department of Education, an agency he says has been overrun by liberal thinking. Only Congress has the authority to close the department, but Trump officials are dismantling it through a series of intergovernmental agreements that move the department’s operations to other federal offices.

Read more: Schools fear unrest as the White House begins dismantling the Department of Education

The future of the government’s massive student loan portfolio has been one of the biggest unanswered questions. At her Senate confirmation hearing, Education Secretary Linda McMahon described the Treasury Department as a “natural” place to take out student loans. Trump later said the Small Business Administration would oversee them.

Conservatives have tried in the past to move federal student loans. During Trump’s first term, his education director talked about creating a semi-private bank to manage student debt. The conservative Heritage Foundation has promoted something similar in its Project 2025 plan, calling for the creation of “a new state corporation with professional governance and management.”

The Treasury Department has often been discussed as an option, yet student loans are viewed as a particularly complex form of debt and some question whether the agency has the appropriate technical expertise. In a 2015 pilot, the Treasury Department tried to collect payments from a sample of thousands of distressed borrowers. Its success rate was lower than that of private collection agencies contracted by the Department of Education.

Federal student loan borrowers are typically considered in default if they do not make a payment in more than 270 days. About 9.2 million Americans are behind on student loans, according to Education Department data released this month. Defaulting on a loan can take a hit to credit scores, and the government can withhold wages and Social Security benefits.

The latest deal from management signals a desire to open the lid on student loan operations at a risky moment. About 12 million Americans are behind on their federal student loan payments in some way, and the industry is bracing for a potentially historic spike in loan defaults as pandemic-era protections expire.

Earlier this year, Trump officials postponed their plans to resume involuntary collections of defaulted loans, which could have meant withholding profits for millions of Americans. It is seen as a politically explosive issue during a difficult midterm year when affordability is already on voters’ minds.