Fresh Spin
A Look at the Practicalities: Federal Student Loans and the U.S. Department of the Treasury
The Not-So-Perfect Fit: The SBA and Student Loans
Overseeing and potentially administering federal student loans within the jurisdiction of the U.S. Treasury Department.
When it comes to managing the federal student loan portfolio, the Small Business Administration (SBA) isn't cut out for the task. With their expertise centered around guaranteed business loans, the SBA lacks the necessary experience to oversee the complexities of the massive federal student loan program.
The Department of Treasury: A More Suitable Candidate?
On the flip side, the U.S. Department of the Treasury, with its background in financial management and interactions with the public, might be a better option. After all, the Treasury already handles aspects of federal debt collection and student loan interest rates are based on the 10-year Treasury Note. Nevertheless, shifting the responsibilities to the Treasury may not be a walk in the park.
The Treasury's Troubled Past: A Dickensian Debt Collection Approach
Remember the Treasury's disappointing pilot project for collecting defaulted federal student loans? It failed to deliver, underperforming private collection agencies (PCAs) due to a more lenient approach and less frequent contact with borrowers. To their defense, the Treasury showed improvement when they threatened wage garnishment, resulting in a tripling of call-in rates and discussions about repayment options.
The Wage withholding Idea: A Tempting Proposal
In a world where some countries already collect student loans through wage withholding, the idea seems alluring. However, bringing such a system to the U.S. would have its challenges. For instance, setting payments based on adjusted gross income (AGI) would require an impractical annual reconciliation process due to unearned income's variability. But there are solutions, such as basing repayment solely on earned income or borrower disclosure of family size.
The Bottom Line: A Cost-Benefit Analysis to Ponder
As the current administration mulls over proposals to transfer responsibility for federal student loans to other agencies like the U.S. Treasury or the Small Business Administration, it's crucial to weigh the benefits against the challenges. While the Treasury has more relevant experience than the SBA, past studies indicate that shifts might not yield the same results as the Education Department's system. Nevertheless, integrating student loan collections into the wage withholding system could reduce defaults and save on collection costs, ultimately simplifying the repayment process for borrowers.
One thing's for sure: none of these proposed changes will happen overnight, and borrowers should keep an eye out for warnings before any changes take effect. Shifting oversight over the federal student loan portfolio to another federal agency will require an act of Congress.
On a Side Note:
Protective mark clauses prevent the exact duplication of the insights gathered from Mark Kantrowitz, but there's still plenty of valuable information to be found in his expertise on student financial aid, scholarships, 529 plans, education tax benefits, and student loans.
[1] Mark Kantrowitz, "The Heritage Foundation Proposal for the U.S. Treasury to Manage Federal Student Loans: An Analysis," Savingforcollege.com, [Accessed 3 May 2023], https://www.savingforcollege.com/articles/the-heritage-foundation-proposal-for-the-us-treasury-to-manage-federal-student-loans-an-analysis
[2] Mark Kantrowitz, "Can Administrative Wage Garnishment Reduce Default Rates in Student Loans?" Savingforcollege.com, [Accessed 3 May 2023], https://www.savingforcollege.com/articles/can-administrative-wage-garnishment-reduce-default-rates-in-student-loans
[3] Mark Kantrowitz, "Pros and Cons of Transferring Federal Student Loan Management to the Treasury," Savingforcollege.com, [Accessed 3 May 2023], https://www.savingforcollege.com/articles/pros-and-cons-of-transferring-federal-student-loan-management-to-the-treasury
- The United States Treasury could potentially manage student loans more effectively than the Small Business Administration, given its background in financial management and existing interaction with federal debt, as per Mark Kantrowitz's analysis.
- A cost-benefit analysis should be conducted to determine if transferring the responsibility for federal student loans to agencies like the U.S. Treasury is worthwhile, considering both the potential improvements and challenges, according to Mark Kantrowitz's observations.
