Under pressure from the White House to reign in student debt, the U.S. Department of Education recently introduced two regulatory packages designed to protect college students with campus debit and prepaid cards from incurring excessive fees and add an income-based prepayment plan that allows borrowers to limit payments to 10 percent of income.
Secretary of Education Arne Duncan said the pair of rules will not only make student loan debt more affordable but "bring overdue reforms to campus cards, a sector that too often puts taxpayer dollars and student consumers at risk."
The DOE estimates 9 million students representing 40 percent of all postsecondary students are enrolled in institutions that offer debit or prepaid card agreements, and nearly $25 billion in Pell Grant and Direct Loan program funds are disbursed annually to students enrolled in these institutions. A number of schools also use campus cards as student identification.
Growing concerns about lack of choice and fee transparency, and evidence that students forced to pay higher fees to use campus cards were losing federal student aid funds as a result, caused regulators to take notice. In particular, a class-action lawsuit brought against Higher One Holdings Inc. in April 2013 was pivotal. It alleged Higher One automatically created bank accounts for college students and deposited student financial aid funds into the accounts without student permission, discouraged students from opting out, and assessed "deceptive and unusual banks fees on student accounts." The case resulted in a $15 million settlement. A similar inquiry the year prior led to an $11 million settlement with the Federal Deposit Insurance Corp. A 2014 Federal Reserve Board probe resulted in extensive changes to Higher One's OneAccount program.
The new DOE rule will require institutions to be more transparent. It stipulates that institutions must offer students greater choice in how to receive financial aid funding, prohibits any requirement to open a certain type of account for student aid refunds and requires institutions to provide a list of neutral options.
A vague area of the regulation requires institutions offering campus card programs to ensure "students are not charged excessive and confusing fees (e.g., overdraft fees and transaction-swipe fees)" when students select an account offered directly or indirectly by contractors that assist institutions in making direct payments of federal student aid.
"What's most interesting about this is the legislation really strays away from saying that it's regulating the financial institutions; it's regulating the colleges," said James Huber, a Partner at Global Legal Resources LLP. "I'm guessing the reason they did that was purposeful, because they probably want to fly under the radar of the really powerful lobbying groups that would fight this. But in effect that's exactly what it does. It's a huge regulation of the financial services industry."
Where the DOE regulation lacks definition, the Consumer Financial Protection Bureau and other agencies are poised to step in. In 2013, the CFPB called on financial institutions to publicly disclose campus debit and prepaid card program agreements with higher education institutions; previously such disclosure had been applicable only to credit card agreements under federal law.
In November 2014, the CFPB issued Prepaid Accounts under the Electronic Fund Transfer Act (Regulation E) and the Truth in Lending Act (Regulation Z), an 870-page proposal to mandate disclosures, error resolution procedures, fee limits, consumer liability limits and other requirements for prepaid card program providers. The CFPB is expected to issue a final rule in 2016.
In January 2015, the CFPB initiated the public comment phase for a proposed Safe Student Account Scorecard. The CFPB said the scorecard will help colleges avoid partnering with financial institutions that offer checking and prepaid accounts with "tricks and traps" by requiring that third-party providers meet certain criteria for sponsorship consideration.
While the CFPB's initiatives are still pending, Huber believes the DOE ruling is an effective way to "dip the toe in" to regulate exorbitant fees. As to long-term implications, he said, "I see some in-house counsels spending a lot of time and money making sure all of their agreements are up to date. But both sides won't be negotiating against each other" since campus card programs generate revenue for the campuses that deploy them.
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