On May 18, 2015, the Department of Education (“DoE”) issued a wide-reaching 300 page Notice of Proposed Rulemaking (“NPRM”), through which the DoE will attempt to clamp down on alleged abuses of the current student financial aid system maintained under Title IV of the Higher Education Act of 1965.  The NPRM’s stated purpose is to ensure that students can conveniently access Title IV funds without incurring unreasonable fees, and without being led to believe they must open an account with a particular provider to receive Title IV funds.

According to the DoE’s regulations, colleges and other postsecondary institutions (“Institutions”), as trustees of Title IV funds, are expected to ensure these funds are delivered to students in a timely and efficient manner.  As such, the NPRM modifies rules specifying:

  • the payment methods DoE uses to provide Title IV funds to Institutions;
  • the charges for which an Institution may credit a student’s account (including prior year charges);
  • the determination of credit balances when an Institution charges for more than a single payment term up front;
  • when books and supplies may be charged as part of tuition;
  • the types of accounts Institutions may use to maintain Title IV funds; and
  • the types of disclosures Institutions must make to students.

The proposed rules also explicitly reserve the right for the DoE to establish a method of directly paying credit balances to student aid recipients.  However, as of today, the DoE lacks the ability to make such direct payments.

Also of note, the NPRM divides the types of arrangements between Institutions and financial account providers into two tiers: Tier 1 and Tier 2.  Tier 1 arrangements are between an Institution and a third-party service provider that performs one or more of the functions associated with processing direct payments of Title IV funds on behalf of the Institution, and  offers one or more financial accounts to students and parents.   Tier 2 arrangements are between an Institution and a bank or financial institution (or another party that offers financial accounts through a financial institution) under which accounts are offered directly to students or their parents.  Note that such arrangements will not be considered in Tier 2 if the Institution establishes that students or their parents do not have credit balances at the Institution.

The proposed Tier 1/Tier 2 rules are intended to address numerous alleged problems with the existing account selection and management processes, and provides students the opportunity to choose their account. The proposed Tier 1/Tier 2 rules would require Institutions that have such arrangements to:

  • maintain a student choice protocol that meets certain requirements;
  • obtain the consent of students or parents, as applicable, when opening an account under a Tier 1 or Tier 2 arrangement prior to sharing personal information about that student or parent with the financial account provider;
  • obtain the student or parent’s consent prior to the account provider or Institution (i) providing an access device to the student or parent or (ii) linking the student’s ID card with a financial account;
  • require reasonable access to surcharge-free ATMs;
  • for accounts offered under a Tier 1 arrangement, (i) prohibit PoS and overdraft fees from being charged to student and parent account holders and (ii) provide students and parents with 30 days following the disbursement of Title IV funds to access those funds without any fees;
  • require public disclosure of contracts governing Tier 1 and Tier 2, together with cost information related to such contracts; and
  • require Institutions with Tier 1 or Tier 2 arrangements to evaluate the contracts governing such arrangements in light of the best financial interests of students.

Comments on the proposal are due by July 2, 2015.  Click here for more information on the NPRM.