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Is Treasury best suited to handle student financial aid?

A statue of 19th century Treasury Secretary Albert Gallatin outside the Treasury Department building. (AP Photo/Jacquelyn Martin, File)

An idea that took shape in the Obama administration is getting fresh attention under President Trump as the Education Department considers handing the operations of its student aid office to the Treasury Department. But the move would be no small feat and could have limited effects if the financial aid system remains the labyrinth that it is today.

The Trump administration’s interest in overhauling the student aid office came to light in a resignation letter sent last week by James Runcie, the head of the Office of Federal Student Aid at the Education Department. He complained of the preoccupation with transferring functions of the student aid office to Treasury when there were more pressing matters at hand, including a student loan servicing contract bid and building out the expansion of the Pell Grant program.

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Runcie, who had served in his position since 2011, said there have been discussions about creating cross-agency teams, holding numerous meetings and retreats to determine feasibility. While he said those efforts “may provide some value,” they would “certainly divert critical resources and increase operational risk in an increasingly challenging environment.”

With a portfolio of $1.2 trillion in student debt, rising loan defaults and mounting consumer complaints of poor loan servicing and abusive debt collection practices, the student aid office has a lot on its plate. It provides more than $150 billion in federal grants, loans and work-study funds to college students, and has become one of the nation’s largest lenders. That role has led some policy experts to question whether the office has the economic expertise to meet the challenge.

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“Federal Student Aid is still run like a 1960s governmental bureaucracy instead of like the nation’s fourth- or fifth-largest bank,” said Barmak Nassirian, director of federal relations and policy analysis at the American Association of State Colleges and Universities. “Lowest-bid procurement practices, non-responsiveness to customers and staffing issues have been perennial problems that have led some to wonder whether the root cause of the dysfunctions may not be the fundamental unfitness of the Department of Education to run a financial institution.”

Nassirian and others say Treasury, with its financial wherewithal, may be best suited to at least manage the distribution and collection of federal student loans. More direct access to data from the Internal Revenue Service could make it much easier to verify borrowers’ earnings for income-driven repayment plans, and a significant portion of loan servicing could be directly assigned to existing IRA infrastructure, he said.

What’s more, the move could provide better analytics on student outcomes by linking upfront borrowing to the post-graduation income data available through the IRS. Shifting student loans over could also produce come savings by eliminating the current premium that Treasury charges the department for funding the direct loan portfolio, Nassirian said.

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Officials at Treasury declined to comment, while the Education Department did not respond to requests for comment.

Treasury certainly has the infrastructure to collect federal debt. It already intercepts state and federal tax refunds to recover defaulted student loans, but a pilot program during the Obama administration illustrates the difficulties of expanding that operation.

In 2015, Treasury ran an experiment to recover more defaulted student debt with less aggressive tactics than the private collection agencies hired by the Education Department. The idea was to save the government money by keeping the collection operation “in house” and help struggling borrowers stay out of default. But a control group of private collectors in the experiment produced better results.

“The pilot had a bit of a muddled goal: Could the government collect nicer, better and with less money?” said Alexander Holt, an independent education consultant. “The clearest results from that study were that it’s really hard to collect money if you don’t bother people a lot and scare them with wage garnishment.”

A part of the problem Treasury faced was contacting people while limiting its calls to one a week. Even when Treasury staff spoke to borrowers, they said the calls lasted 40 percent longer than other conversations about federal debt because of the myriad options available in the student loan program: including forbearance, consolidation and income-driven repayment.

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The 2018 Trump budget calls for the consolidation of many loan repayment options to simplify the unwieldy student aid system for new borrowers. Even if Congress adopted the proposal, the millions of people currently contending with the repayment would receive no relief, said Clare McCann, a former policy adviser at the Education Department under Obama. Proposing to relocate FSA, she said, is a distraction from addressing problems confronting existing borrowers.

“It’s not like the Trump administration could do this on their own. They’re definitely taking time out from other work to focus on this legislative proposal that doesn’t have a clear benefit,” said McCann, now a senior policy analyst at New America Foundation. “It seems like an odd use of time given how understaffed they are and how many things are on their plate.”

It would require congressional action to move the student aid office to Treasury. Republican and Democratic lawmakers have been critical of FSA over the years, but they are not in agreement that the office would be better off in another agency.

Sen. Patty Murray (Wash.), ranking Democrat on the Senate Health, Education, Labor and Pensions Committee, said she worried at the idea of “pawning student loan borrowers off to a department that’s run by a foreclosure king,” referencing Treasury Secretary Steve Mnuchin’s controversial record as chief executive of OneWest Bank. Aides to Sen. Lamar Alexander (R-Tenn.), chairman of the committee, declined to comment, saying there has been no official proposal from the administration.

Ideological division over the future of FSA is evident on the House Committee on Education and the Workforce. Rep. Virginia Foxx (R-N.C.), the committee chairwoman, said Congress should consider shuttling the office over to Treasury, “especially in light of the FSA’s history of inefficiency and mismanagement.” Rep. Bobby Scott (Va.), the ranking committee Democrat, disagrees.

“Treasury’s focus is on collecting money, not on promoting access to higher education,” Scott said in an email. “Through its administration of the Earned Income Tax Credit, one of our most important anti-poverty programs, we have seen that Treasury does not view outreach and customer service as a core part of its mission.”

Scott touches on one of the prime concerns consumer advocates have with Treasury running the student loan program. An agency focused on finance, they say, may have little appreciation for the underlying social policy at the heart of federal student lending. McCann said much of the oversight and accountability in the aid programs is about whether schools are providing quality education, and that is not something where Treasury would have an expertise.

Justin Draeger, president of the National Association of Student Financial Aid Administrators, said: “Student aid is part of a comprehensive education policy basket, and separating out those baskets from policy and implementation, which is FSA, has some pretty significant risks.”

The only benefit Draeger sees in moving the student aid office to Treasury is if it eventually leads to automatic payroll deduction for student loan repayment. That idea, which has broad support among liberal and conservative policy wonks, would have the government enroll borrowers in an income-driven plan and withhold payments from their paychecks, much like Social Security taxes.

It could substantially reduce defaults and delinquency while keeping payments affordable, but some worry automatic repayment could prioritize student debt over other financial obligations to the detriment of low-wage workers. Paycheck withholding was considered during the Clinton administration after a 1995 report examined whether the Education Department should transfer student loans to the IRS.

Dismantling the student aid office has been proposed several times over the last two decades but gone nowhere. It’s unclear whether this time will be any different. Some say the stakes are higher given the amount of money flowing in and out of the office.

“The question, in some ways, is whether it might be easier to teach higher ed policy to Treasury than it has been to teach banking to Education,” Nassirian said.