College students’ federal aid has increasingly been put at risk by the cozy relationship between institutions of higher education and credit card issuers over the years. While consumer advocates and legislators have debated whether or not products like student IDs that double as credit or debit cards provide an actual benefit to students or if they’re just a way for schools and banks to rake in the big bucks, the Department of Education finally took steps today to ensure students are afforded proper protections from excess fees and other harmful practices with the proposal of regulations targeting the college debit and prepaid card marketplace.

The Department’s proposed rules – published in the Federal Register [PDF] – aim to regulate the way colleges can enter into marketing agreements with banks and prepaid card issuers who wish to access their student populations, as well as provide certain restrictions when it comes to allowable fees assessed on the cards.

“The proposed regulations are intended to safeguard students from excess fees and provide students the freedom to choose how to access their federal student aid funds when paying for college,” the Dept. said in a statement.

In all, the Dept. estimates the tougher standards and greater transparency of the agreements will protect as many as nine million college students receiving $25 billion in federal student aid.

“It is critically important to ensure that students can freely choose how to receive their federal student aid refunds,” U.S. Under Secretary of Education Ted Mitchell said in a statement. “Students need objective, neutral information about their account options. For example, students should be able to choose to receive deposits to their own checking accounts and not be forced to utilize debit cards with obscure and unreasonable fees.”

NEW SAFEGUARDS

With about 40% of all postsecondary students enrolled in institutions that have debit or prepaid card agreements with billions of dollars in Pell Grant and Direct Loan program funds disbursed to students at those institutions annually, the Dept. determined regulatory action had become necessary.

The proposed regulations would require that schools who choose to partner with a financial institution do so under one of two types of arrangements.

A Tier One (T1) arrangement is between an institution and a third-party servicer that performs one or more of the functions associated with processing direct payments of title IV funds on behalf of the institution and that offers one or more financial accounts to students and parents.

A Tier Two (T2) arrangement is between an institution and a financial institution or entity that offers financial accounts through a financial institution under which financial accounts are offered and marketed directly to students or their parents.

The proposed regulations would:
• Prohibit institutions from requiring students or parents to open a certain account into which their credit balances are deposited.

• Require institutions to ensure that students are not charged overdraft fees if students select an account offered directly or indirectly by contractors that assist institutions in making direct payments of federal student aid.

• Require an institution to provide a list of account options that a student may choose from to receive credit balance funds, where each option is presented in a neutral manner and the student’s preexisting bank account is listed as the first, most prominent, and default option. And,

• Require institutions to ensure electronic payments made to a student’s preexisting account are as timely as, and no more onerous to the student than, payments made to accounts marketed through the institution.

“Through these proposed protections, the Education Department seeks to protect students from unreasonable account fees, safeguard taxpayer dollars, provide transparency regarding accounts offered to students by requiring disclosure of the agreements between institutions and financial account providers as well as the costs students incur, ensure students have a choice about how to receive their federal aid, and prohibit their personal information from being shared without their consent,” the Dept. said in its announcement.

A LONG TIME COMING

Friday’s announcement of the proposed rules quickly drew commendations from regulators with the Consumer Financial Protection Bureau.

Rohit Chopra, student loan ombudsman for the CFPB – which has extensively investigated college credit and debit cards – said the Bureau plans to continue to work toward greater safeguards for students.

“Students deserve access to safe and affordable financial products—not to have their loans and scholarships skimmed away by surprise fees,” Chopra said in a statement [PDF]. “Financial products marketed to students should have clear upfront terms and clearly disclose partnerships between colleges and financial institutions. The CFPB looks forward to reviewing the proposed rule and will continue to work with the Department of Education to ensure students are protected from harmful practices.”

Consumer advocacy groups were also quick to applaud the Dept. for taking steps to protect students.

Our colleagues at Consumers Union – the advocacy branch of Consumer Reports – praised the Dept. for its strong stance on college prepaid credit and debit cards.

“These rules will help provide greater accountability that has been lacking for too long around these school-bank partnerships,” Suzanne Martindale, staff attorney for CU, said in a statement [PDF]. “We applaud this strong first step by the Department, and urge them to protect all students from being steered into accounts with harmful fees that eat into their precious financial aid dollars.”

Likewise, Maura Dundon, senior policy counsel for the Center for Responsible Lending, commended the Dept. for ensuring all students are protected, especially from excessively highs overdraft fees.

“Colleges have a responsibility to ensure the safety of their students – and this should include financial safety as well,” she said in a statement. “The proposed Cash Management rule would help restore college’s proper role in educating students to become informed citizens, instead of taking advantage of their loan funds.”

Dundon goes on to say that banning costly overdraft fees allows student financial aid to go toward supporting higher education, not banks.

YEARS OF ISSUES

The proposed rules come after consumer advocates – including those from CRL and CU – raised issues with the increase of campus debit and prepaid card accounts being offered to students in exchange for monetary and other benefits to schools.

Over the years, advocates and legislators have taken issue with the way federal funds are handled when such credit and debit card agreements are in place, including the lack of choice a student has when it comes to the institution providing the cards, the unreasonably high fees associated with using the cards, and lack of transparency when it comes to the agreements.

While many agreements have cut back on the high fees associated with ATM and transaction usage, a CRL report issued earlier this year found the cards are more advantageous to the banks than students.

The report – which focuses on overdraft policies for ATM withdrawals and transactions present in many student banking accounts – determined that many of the accounts offered through exclusive deals between colleges and financial institutions include abusive practices that can quickly drain student aid funds.

As for the actual agreements, Consumer Union raised concerns with the CFPB over the availability and continued lack of transparency regarding college and credit card issuer agreements.

The CARD Act, which was passed in 2009, provides several protections for consumers, one of which requires colleges that have credit card marketing agreements with financial institutions to make such agreements available to the public online or upon request.

CU conducted an informal investigation to see if members of the public could easily obtain copies of the agreements by calling the main campuses and requesting the information – as required by the CARD Act.

Colleges selected for the investigation were chosen because they have the largest active account volume and do not post agreements or information on how to obtain copies of agreements online.

In all, the organization found that it challenging, if not impossible, for a member of the public to get information about college credit card agreements.

The Department’s proposed rules are available for viewing in the Federal Register and public comment will be accepted for the next 45 days though the Department’s “Program Integrity and Improvement” package.

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