The departure last week of James W. Runcie, who was chief operating officer of the Federal Student Aid office in the U.S. Education Department, sparked headlines — but one paragraph in his resignation letter flew relatively under the radar. Mr. Runcie wrote to his colleagues that senior managers in the office had met with officials in the U.S. Treasury Department to discuss “transferring all or a portion of FSA to Treasury.” The shift could provide “some value,” he said, “but it will certainly divert critical resources and increase operational risk in an increasingly challenging environment.”
The idea to move student aid out of the Education Department — specifically the roles of collecting and managing student loans — has been rehashed several times over the last few decades, but its re-emergence raises questions about what would change if it happened.
If the entire student-aid office were to move into the Treasury, there probably wouldn’t be significant immediate differences, said Daniel T. Madzelan, assistant vice president for government relations at the American Council on Education. Moving the entire Federal Student Aid operation, he added, would most likely be too complex a task to be beneficial. It would be more plausible to keep the majority of the operation in the Education Department and move the billions of dollars in the federal student-loan portfolio over to the Treasury, he continued.
Critics worry that moving the student-loan portfolio to the Treasury would harm borrowers, while others see possible benefits, such as a streamlined income-certification process. That would better allow borrowers to qualify for income-driven repayment, requiring them to pay only the amount of student-loan debt they can afford each month.
A Steady Interest
Policy makers in the United States have regularly studied ways to increase collaboration between the Education Department and the Treasury — specifically the Internal Revenue Service — when it comes to servicing loans, said Mr. Madzelan, who has worked in the department for 33 years in various roles. In 1995 the two departments produced a report examining the feasibility of having the IRS collect repayments of student loans. The report, which the agencies were directed to create in a document that accompanied the 1993 Omnibus Budget Reconciliation Act, was submitted to Congress in June 1995.
Perhaps the prospect of a stay in Leavenworth would finally reduce the multibillion-dollar loan-default problem.
Chester Finn, an assistant secretary of education during the Reagan administration, told a congressional committee that was considering the proposal that allowing the IRS to collect loans might encourage borrowers to repay them. “Perhaps the prospect of a stay in Leavenworth would finally reduce the multibillion-dollar loan-default problem,” he said.
The final report evaluated ways the IRS could be involved in student-loan collection without requiring “broad (and costly)” revision to the way people report their taxes and the types of funds that can be withheld, given the bureau’s finite resources. After analyzing four options, officials determined that further involvement wouldn’t work.
The Clinton administration ultimately ruled out the possibility of transferring student loans to the IRS. Richard W. Riley, who was the education secretary, said that the move would be prohibitively expensive and that “since most borrowers default on their student loans because they are unable to make the payments, the IRS would be no more able to collect these payments than the Department of Education.” Mr. Riley added that perhaps large employers could make wage-withholding arrangements to streamline the process.
Move to the Treasury
No administration, dating back to at least that tumultuous summer in 1995, has been able to avoid the question of moving the operation. The Obama administration was no exception.
“In the first months of the administration the question came up about FSA being separate from the rest of the department as a kind of semi-independent performance-based organization,” said Robert M. Shireman, a deputy undersecretary in the department during the Obama era. Several issues were raised during discussions about the possible move, including questions of oversight, enforcement, fraud, and abuse of the loan program at colleges. In the end, he said, department officials decided that the time and effort that would go into moving the office would not be worth the resulting disruption.
At the Treasury Department ... student loans would be a tiny fish in a huge pond.
Better cooperation is desperately needed between the Treasury Department and the Federal Student Aid office to ease the repayment process for borrowers, Mr. Shireman said, which could be a part of the Trump administration’s interest in the move. But that inclination may be short-sighted, he said, because the Treasury’s wide range of responsibilities may lead to borrowers’ interests being poorly served. “The hazard is that getting high-level attention to problems in that system would be more difficult at the Treasury Department because student loans would be a tiny fish in a huge pond.”
Keeping the system as it is, however, comes with its own set of issues and leaves the problem of student-loan defaults unfixed. Some policy wonks have suggested that a complete switch to automatic enrollment in income-driven repayment plans could lessen defaults, but that is not enough, said Nicholas Hillman, an associate professor of higher education at the University of Wisconsin at Madison. Those enrolled in income-driven repayment plans can still default, he said, because the government does not automatically extract payments from borrowers. “The argument is that for income-driven repayment to truly work, you have to have it talking to the tax system somehow.”
The Treasury launched a two-year pilot program in 2015 to learn more about how the government collects on student-loan defaults. The program ran into several issues, including contacting borrowers and navigating the rehabilitation process, that led several observers to call it a failure. But not everyone is sold that the criticism of the program is fair.
Persis Yu, director of the National Consumer Law Center’s Student Loan Borrower Assistance Project, said the debt-collection pilot could be somewhat instructive of what could happen if the student-loan office were moved to the Treasury. There would be a steep learning curve, she said, but in a best-case scenario, a move could streamline repayment. If student loans were serviced through the IRS, those enrolled in income-driven repayment plans would no longer have to certify their income every year, because the information would already be available to them. That could decrease the number of people who don’t file taxes but who are put into loan default as opposed to being certified as owing no money because their discretionary income is so low.
Still, many observers are withholding optimism that moving student-loan servicing to the Treasury would be helpful. Even worse, some fear that it could be explicitly harmful if the department squeezes borrowers for money.
Chuck Knepfle, past chair of the Higher Education Loan Coalition’s board of directors, noted that “there is absolutely nothing about protecting the borrower’s access to higher education in the Treasury’s mission statement.”
And that could be bad news for borrowers.
Representatives of the Education Department did not respond to requests for comment about the likelihood of a move or a possible timetable for it.
Adam Harris is a breaking-news reporter. Follow him on Twitter @AdamHSays or email him at adam.harris@chronicle.com.
