Key facts
- Private student-loan collectors previously penalized for misleading or abusive practices may resume collecting federal debts.
- The Trump administration is transferring defaulted federal student loans from the Education Department to the Treasury Department's Cross-Servicing program.
- Two agencies involved, Pioneer Credit Recovery and Transworld Systems, have faced lawsuits and fines for deceptive practices.
- Experts warn this shift could expose borrowers to higher collection fees and increased risk of redefault.
- The pause on involuntary collections for student loans remains in place while the department prepares for repayment changes.
Millions of student-loan borrowers are at risk of facing debt collectors who have previously been penalized for 'misleading' or 'abusive' behavior. This situation arises as the Trump administration transfers the management of defaulted federal student loans from the Department of Education to the Treasury Department's 'Cross-Servicing program.' This program utilizes private contractors to collect federal debts. Two such contractors, Pioneer Credit Recovery and Transworld Systems, have a history of facing lawsuits and fines from federal watchdogs for deceptive practices, including misrepresenting potential legal action and steering borrowers into more expensive repayment options. Experts, including former Education Department officials, express concern that re-engaging these companies could lead to higher collection fees, borrower confusion, and an increased likelihood of redefaulting on loans. The Department of Education data indicates over 10 million borrowers are currently in default or delinquency. Involuntary collections have been paused since January, with no specified timeline for their resumption. Treasury Secretary Scott Bessent asserts the Treasury Department possesses the necessary expertise and operational capability to manage these collections effectively and instill financial discipline. However, critics question the Treasury's specific expertise in student-loan servicing and oversight of these private agencies, pointing to past issues where private collectors were incentivized by high fees for steering borrowers into certain repayment plans, often resulting in high redefault rates. The transfer is expected to begin with defaulted borrowers before expanding to the entire federal loan portfolio.