The Department of Education Takes Control of College-Issued Debit and Prepaid Cards

New regs to clamp down on fees banks charge to students for access to financial aid.
By John Sandman ,

The Department of Education (ED) announced new regulations on last week designed to protect students in the rapidly-expanding college debit and prepaid card market. The regs would shield them from high fees and the aggressive marketing of products that benefit financial services firms more than their campus customers.

The proliferation of campus debit and prepaid cards not only affects the cost of student loans, but the way students get access to their money across the board.

"Protecting students and borrowers has been a key priority for the Obama Administration," said Secretary of Education Arne Duncan. "The two final rules published today represent a continuation of our efforts. These regulations will help make sure student loan debt is affordable for all borrowers and bring overdue reforms to campus cards, a sector that too often puts taxpayer dollars and student consumers at risk."

Under the final regulations, students will be able to choose how to receive their Federal student aid refunds and be given objective and neutral information about their financial aid disbursement options. They should no longer be forced to pay excessive fees to access their federal student aid, including Pell Grants.

Colleges and universities will be required to publicly identify arrangements they have with financial institutions to market cards and other financial products with the school’s mascot or logo.

Student advocates have been concerned about double standards in financial services industry, where for students are charged higher fees for campus debit and pre-paid cards than the general public pays for generic products.

“The new rules will stop schools and prepaid card companies from using unfair and deceptive tactics to push students into using cards that are heavy on fees,” said National Consumer Law Center (NCLC) associate director Lauren Saunders. “The financial aid process should not be used to steer students into costly prepaid and debit card accounts that are not right for them.”

Saunders added, “Greater transparency will help fix a broken system where some schools put revenue-sharing deals ahead of the interests of their students.”

However, the NCLC was not completely sanguine about the new rules, saying they had less robust protections for accounts that are not offered by the financial aid disbursement servicer but are linked to student ID cards. In some cases, they may be promoted during the financial aid process as a way to receive funds. While those accounts must provide reasonable access to free ATM withdrawals, there's nothing to prevent the issuer from charging unnecessary overdraft fees.

“Students must still be wary and check the fees before activating a debit card tied to their student ID card,” explained Saunders. “Some campus card programs charge high overdraft fees on electronic transactions, unlike most prepaid card or checkless checking accounts.”

Industry sources noted that ED's new regulations steer clear of the banks themselves. While third-party card providers are affected, banks that originate student loans are not.

Still, the NCLC’s Saunders applauded ED for taking steps to protect student with campus cards from being jobbed, but she urged the CFPB "to ban overdraft fees on all prepaid and debit cards.” Overdraft fees can run as high as $37, and banks have been known to reorder transactions to clear the lowest payments first, increasing fee revenue.

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