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Colleges Banned From Forcing Some Prepaid Debit On Students

After years of debates, universities will be prohibited from forcing students to have federal aid dispersed on prepaid or debit cards that charge fees for overdrawing the accounts, according to rules issued Friday by the Education Department. The new set of restrictions could cost schools millions, as they will no longer be able to make contracts with banks.

Currently, around 9 million college students are attending schools that require students to accept their loans on a plastic card. Those cards collectively disperse $25 billion in Pell Grants and federal student loans to students every year, according to the Education Department. Colleges like these cards as a mechanism to disperse “credit balance” – or what is left over after a student’s direct educational costs (tuition and fees) have been paid. Processing that money is then outsourced to banks and other FIs – who pay schools significant sums for the privilege.

And while the new rules are intended to protect students from being pushed into onerous terms, some are complaining they do not go far enough.

The main complaint about the cards given to students is fees – which critics say are acting as an unofficial, but very costly, tax on financial aid. According to a report from the Government Accountability Office, while some of the fees — overdraft or maintenance — are standard and what one might expect from a bank, others — like a fee for card purchases using a PIN number rather than a signature — are non-standard and look a bit like gouging to outside observers.

The new rules seek to cut off that perceived gouging by ensuring that students who receive credit balances on a campus card are not hit with fees for overdrawing the account. This protection, however, does not carry over to other types of cards – like student IDs – which some schools essentially use as hybrid ID/pay cards.

“What’s been banned for the financial aid disbursement channel is quite strong, but it’s not nearly as good and strong for the types of arrangements you can be exposed to outside of that channel,” said Chris Lindstrom, higher education advocate for the U.S. Public Interest Research Group.

The new rules will require that schools provide students a series of options to receive excess tuition funds – without an attempt to steer students to the one that makes the college money. The student’s actual bank account must be presented as their first choice.

“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,” said Under Secretary of Education Ted Mitchell. “Students need objective, neutral information about their account options.”

Industry groups have lobbied against strong rules and noted that what is in use today is similar to many mainstream products currently available.

“Though today’s proposal seems to have improved from its original form, what is being veiled as pro-consumer reform is far from it and based on little to no actual data,” said Richard Hunt, president of the Consumer Bankers Association, a trade group. “The burdensome cost of new regulatory requirements on schools will ultimately be paid for by students, increasing the cost of college at a time when the government should be trying to do the opposite.”

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