The U.S. Office of Federal Student Aid (FSA) recently released a set of recommendations on best practices that would alter federal student loan servicing contracts, potentially limiting the number of loan servicers, subjecting contractors to increased requirements and penalties, and suggest introducing a mechanism for reporting contractors’ consumer law violations to the Consumer Financial Protection Bureau. The U.S. Department of Education plans to use these recommendations as it begins to reopen bidding on its servicing contracts.

The recommendations come amid increasing concern over the size and status of taxpayer-funded federal student loans. As student debt reaches record highs — now surpassing $1.1 trillion — President Barack Obama released a memorandum titled “Student Aid Bill of Rights.” The memorandum, issued on March 10, states that “[m]ore than one in eight [f]ederal borrowers default on their loans within three years of leaving school.” The plan to reduce default rates includes creating a website to process borrowers’ complaints, raising standards for loan servicers and collection agencies and requiring increased consumer protections.The memorandum charged an interagency task force representing the Department of the Treasury, Department of Education, Office of Management and Budget and Domestic Policy Council with identifying changes to performance-based contracting that will better ensure borrowers make affordable monthly payments and avoid default.

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