If Student Loans Are Removed From the Department of Education, Where Should They Go?
As momentum for closing the US Department of Education gains steam, questions about the transition are starting to surface, with the biggest ones concerning student loans. While we have argued for the privatization of student loans (full report or blog summary), which would eliminate the need for a new home for student loans, most of the current discussion revolves around keeping the existing loan programs but moving them to another department or agency, with the Department of the Treasury and the Small Business Administration (SBA) being the most discussed new homes. Treasury is the better choice for three reasons.
First, just under 40 percent of students are repaying through an income-driven repayment (IDR) plan, which requires information on income, information that the Treasury already has but SBA does not. Under IDR plans, payments are a set percentage of income (typically 10 percent) each month. With monthly payments varying, the length of the loan varies too, with high earners repaying their loans more quickly. Since the Treasury already collects income information (through the Internal Revenue Service) needed for IDR, it is better positioned to manage IDR plans than the SBA.
Second, the Treasury already has systems set up and running to deal with troublesome loans. For example, the Treasury Offset Program is used to collect unpaid taxes and student loans from borrowers who default by garnishing their tax refunds and other government payments. The SBA would have to set up its own system or outsource the task to Treasury.
Third, SBA’s experience facilitating loans is irrelevant for student loans. One of the main things the SBA does is provide loan guarantees to private lenders, which means it has considerable experience evaluating the quality of loans (often called underwriting). But student loans do not go through underwriting as eligibility and loan terms are all set by Congress, which renders SBA’s greater experience in underwriting irrelevant. Relatedly, SBA’s experience with loan guarantees is likewise irrelevant, because student loans should not have loan guarantees.
Overall, if student loans are moved, the Department of the Treasury would be a better choice than the Small Business Administration.