Moving Student Loans from the US Department of Education

by Dr. Watson Scott Swail, President & CEO, Educational Policy Institute

There is an interesting piece in the Chronicle of Higher Education today on federal student loans. The piece argues whether FSA should be taken out of the US Department of Education and moved to the Treasury Department. What would be the value in doing such a thing?

There is some value in this argument. First, it would allow the Trump Administration to significantly reduce the size of the US Department of Education and its budget. Yes, I know. Wouldn’t it be a simple movement of dollars and not really shrink anything? Yes, mostly. The cost of serving loans is costly and the Treasury would surely have to expend those dollars. But it is possible that the Treasury Department could do so in a more efficient manner. That is not a guarantee that they would be more efficient: only a possibility. Thus, let us assume that there will be a slight savings in moving FSA to the Treasury.

The worry of doing this, as Bob Shireman and others point out, is that the Treasury has little interest in servicing student loans. The FSA, and previously private banks before the Direct Loan process, provide some assistance to universities and borrowers to ensure smooth lending processes as well as help in repayment issues, including forbearance and default. The thought is that the Treasury Department will be more steadfast on enforcing repayment while not necessarily providing the same level of service to assist students who are having difficulties.

But shouldn’t students be treated just like other borrowers in the economy? No, they shouldn’t, mostly because most non-educational loan borrowers are not within the 18-24-year age bracket. Research clearly shows that many students have a limited understanding of the loan process and are even less clear on the repayment process. Therefore, students are different than the average borrower, resulting in a program cost in terms of services required to loaning monies to youth. If the FSA were to move to Treasury, they would have to deal with these issues. It wouldn’t be as clean as they would want it to be, because loaning to young students is not a clean business. So that is a concern to be sure.

Others argue that this could be taken care of the Internal Revenue Service (IRS). It may be fair to say that most people do not have a lovey relationship with the IRS. But let us be clear: the IRS is exceptional at what they do. Let us not blame IRS policies on them—Congress makes the rules. But the IRS does a more-than-respectable job collecting tax dollars from taxpayers. Given that there are programs within the federal government that require the IRS to provide education tax credits, it also stands within reason that the IRS could take on the task of running a loan program, too.

Is there a downside to leaving the student aid program within the US Department of Education? Not necessarily, other than the fact that the US Department of Education tends to be overly bureaucratic and not always well staffed. As well, there is some resonance to the issue of keeping the dollars and cents issues within the government sectors that are better served to dishing out and collecting funds.

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