Payments Innovation

Government Piloting Debit Card To Rein In Student Loan Refund Spend

The Department of Education is gearing up to roll out a pilot program in which college students’ federal financial aid surpluses will be distributed via prepaid debit cards.

BuzzFeed, citing a January notice, reported that by putting the payment on a debit card, the Education Department can better control how student loan borrowers use the money. The program, which may include as many as 100,000 students, will start later this year and will handle the federal financial aid left over after a school is paid, money which is usually paid out to the student via a check or bank deposit. By moving it to a debit card, BuzzFeed said the Department of Education would act more like a bank, giving the money directly to students and then being able to monitor usage.

Elizabeth Hill, a spokeswoman at the Department of Education, said the government won’t “exercise” control over how students spend their college loan money. However, BuzzFeed highlighted the fact that the January notice stated that, with the debit card, the government could manage money transferred onto the cards from parents and friends and that it would have the ability to restrict certain purchases and services. The new debit card may even come with a text messaging service warning students on what spending their financial aid money will do to them financially over the long term.

Refunds from student loans are supposed to be used for expenses related to college, like textbooks or computers. They can also be used for rent, food and daycare, things that will support the student as he or she earns a college degree. There are no rules, however, governing how students spend that money; in some cases, they use it all on alcohol or clothing. The prepaid card will likely also have a complementary mobile app so students can monitor their financial aid, noted BuzzFeed.

Wayne Johnson, who now heads up an innovation project at the Department of Education, told Inside Higher Education last year when he was head of the government agency’s financial aid department that the prepaid cards would enable the government to control spending of a student’s loan refunds. “We will have controls,” Johnson said. He lasted in his role as head of Federal Student Aid for seven months before transferring, BuzzFeed said.

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