Back in May, the Department of Education proposed rules to govern college prepaid and debit cards in order to afford students proper protections from excess fees and other harmful practices. Fast forward five months, and those rules have are now finalized. 

The Dept. of Education announced Tuesday that it had finalized regulations to protect students and the nearly $25 billion in federal student aid issued on debit and prepaid cards through college’s lucrative partnerships with prepaid card issuers.

With about 40% of all postsecondary students enrolled in institutions that have debit or prepaid card agreements, the Dept. aims to protect students from aggressive marketing, restricted choices and high fees.

“The final rules published today represent a continuation of our efforts,” Arne Duncan, Secretary of Education, said in a statement. “These regulations will… bring overdue reforms to campus cards, a sector that too often puts taxpayer dollars and student consumers at risk.”

Under the Department’s final campus banking rule – which goes into effect in July 2016 – students will be able to freely choose how to receive their Federal student aid refunds, will no longer be forced to pay excessive fees to access their funds and will be given objective and neutral information about their financial aid disbursement options.

PROTECTION FROM FEES
While much of the Department’s final rule deals with disclosures and ensuring that students’ funds are easily accessible, it also affords protections from costly fees that can dwindle funds quickly.

Under the rule, institutions must 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.

Over the years, advocates and legislators have taken issue with the unreasonably high fees associated with actually using campus cards.

While many agreements have cut back on the high fees associated with ATM and transaction usage, a Center For Responsible Lending 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.

CRL examined eight debit card agreements identified by a Government Accountability Office report to determine what the annual cost of the products would be for students who incur two, seven and 19 overdrafts per year.

While many of the cards examined by CRL touted low upfront costs, such as free monthly maintenance and free out-of-network ATM use, all but one included high-cost overdraft fees similar to those on more generally available bank accounts.

Bank overdraft policies varied significantly between the seven institutions that charged the fees. The cheapest overdraft was reported to be $23 while the most expensive was $37. Additionally, the banks charged an array of extended fees if the account was negative for a certain number of days after the initial overdraft.

CLEAR OBJECTIVE INFORMATION
Currently, many schools provide students with campus IDs that double as prepaid or debit cards. At times, without being given a choice, these pieces of plastic are loaded with hundreds – sometimes thousands – of dollars in student federal aid refunds.

Consumer advocates and legislators have long debated whether or not this action provides an actual benefit to students or if it’s just a way for schools and banks to rake in the big bucks.

According to a Consumer Financial Protection Bureau report from Dec. 2014, colleges that provided such cards received nearly $43 million in royalties and bonuses through marketing partnerships with card issuers.

Advocates have raised concerns about the ability of colleges and universities to provide students with clear, objective options when it comes to federal loan disbursements if they have such marketing agreements.

While these institutions are required under the CARD Act to make card issuer agreements available to the public online or upon request, an informal investigation by our colleagues at Consumers Union found it challenging, if not impossible, for a member of the public to obtain the information.

Although the Department’s rule doesn’t ensure this data will be more easily obtainable, it does require an institution to provide students with a list of account options that they may choose from to receive their student aid refunds – including those other than the partnership issuer.

Each option must be presented in a neutral manner. It must also be made clear that the student can have their student aid deposited to their preexisting bank account. If a student opts to have their funds added to a preexisting account, the school must ensure the deposit is made as timely as payments make to accounts marketed through the institution.

A WELCOME CHANGE 
The Department’s final rules quickly drew commendations from consumer advocates and regulators with the Consumer Financial Protection Bureau, which has extensively investigated college credit and debit cards.

Maura Dundon, senior policy counsel at CRL, said in the statement that the rules will go a long way to protect students from the often deceptive and unfair nature of college-bank marketing partnerships.

“It is simply unconscionable for colleges to join forces with banks and their affiliates to push students into high-fee bank accounts that siphon away their financial aid money through overdraft fees,” she said. “The rule will prevent the student loan system from turning into a marketing platform for banks and their affiliates to gouge students.”

Likewise, Suzanne Martindale, staff attorney for Consumers Union, commended the Dept. for its long-awaited action.

“Students deserve safe and convenient access to their financial aid funds without incurring costly charges,” she said in a statement. “We applaud the Department of Education for taking action to protect students using campus banking products from aggressive marketing, restricted choices, and high fees.”

The U.S. Public Interest Research Group also chimed in with appreciation for the new rules, declaring that student had won against banks.

“Each year, billions of dollars of financial aid flows to students on campus. Banks want a piece of the action. Students are unfairly targeted by banks, and the Department of Education rule levels the playing field,” Christine Lindstrom, U.S. PIRG Higher Education Program Director, said in a statement. “Overall, most students will save money in these accounts beginning in July, so this is a big victory for students.”

CFPB director Richard Cordray was also quick to argue the importance of the Department’s rule, noting that it stands to protect millions of college students around the country.

“Students deserve access to safe and affordable financial products,” Cordray said in a statement. “We applaud the Department of Education on these important steps to increase protections for our nation’s students. I look forward to continuing to work with them to help ensure all students are protected from harmful practices.”

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