On October 27, 2015, the United States Department of Education issued 433 pages of new regulations governing student loan programs under the Student Assistance General Provisions regulations promulgated under the Higher Education Act of 1965. The new regulations target a growing trend in higher education of financial institutions partnering with colleges and universities to provide prepaid cards and debit accounts to college students, with colleges often disbursing student loan funds to those cards.
The department indicated that its regulations were enacted in response to concerns of consumer advocates and others about alleged practices associated with these partnerships. Specifically, the department was concerned about allegations that educational institutions prioritized disbursements to their own affiliated accounts over aid recipients’ preexisting bank accounts; that schools were implying to students that signing up for the card and/or debit account was a precondition to receive federal student aid; that financial institutions were providing their partner financial institutions with private student information unrelated to the financial aid process before aid recipients consented to opening accounts; that access to funds through the college accounts was not always convenient; and that aid recipients were allegedly “charged onerous, confusing, or unavoidable fees in order to access their student aid funds or to otherwise use the account.” In the end, according to the Department of Education, “these practices indicate that many institutions have shifted costs of administering the title IV, student aid programs from institutions to students” and that regulation was therefore warranted.
The new regulations impose the following key new requirements on partnerships between higher education institutions and financial institutions. They:
- Require institutions to establish a “student choice” process that prohibits the institution from requiring students to open a specific account into which credit balances must be disbursed, and require the institution instead to provide a neutral list of account options;
- Require institutions to ensure that electronic payments made to a student’s preexisting bank account are instituted in a manner as timely as, and no more onerous than, payments made under an account made available to the student;
- Limit the amount of personally identifiable information about students that may be shared with certain financial account providers prior to the student’s selection of such a provider;
- Require the educational institution to obtain the student’s consent prior to issuing the student an “access device” (e.g., a college identification card) that is also used for accessing the financial account;
- Mitigate fees by requiring reasonable access to surcharge-free ATM machines and, for certain accounts, prohibiting point-of-sale fees and overdraft fees charged to student account holders;
- Require certain consumer disclosures for contracts governing the relationships between the institutions and financial institutions; and
- Require many institutions to “establish and evaluate” their contracts with financial services providers “in light of the best financial interest of the students.”
The regulations also make changes to the manner in which educational institutions count, for enrollment status purposes, courses that a student is retaking for credit and streamline requirements for converting clock hours to credit hours. Outgoing Secretary of Education Arne Duncan claimed that “these new regulations will help make sure student loan debt is affordable for all borrowers and bring overdue reform to campus cards, a sector that too often puts taxpayer dollars and student consumers at risk.”
While these new regulations do not purport to directly regulate the financial services industry, they effectively do so by regulating the terms under which educational institutions can partner with banks and other financial services providers to offer banking products to students. In a statement, American Bankers Association president Frank Keating warned that the new regulations could “drive financial institutions to abandon the student bank account market, reducing competition, availability and choice for students.”
Financial services businesses currently offering student banking products should begin reviewing the terms governing their relationships with colleges and universities. The new regulations take effect on July 1, 2016, and will require compliance in 2017. In addition, financial institutions should also monitor how these new regulations will dovetail with the CFPB’s January 2015 “Safe Student Account Scoreboard” proposal, which seeks to provide “responsible institutions of higher education with a standardized format to solicit critical cost and feature information from prospective financial institution partners.”