The Department of Education (DOE) recently released a first draft of proposed changes to 34 CFR Part 668, Subpart K, which regulates management and disbursement of Title IV Higher Education Act (HEA) program funds. The proposed changes in Issue Paper 4 – Program Integrity and Improvement Issues would add nearly prohibitive limitations on sponsored accounts, impacting both checking accounts and prepaid card accounts. The proposal also would open the door for the government to offer its own financial accounts, along with debit or prepaid cards.

While the proposed changes would require relatively standard disclosure and consent requirements for sponsored accounts, the DOE’s proposal includes some extreme prohibitions, including prohibition of maintenance fees, any ATM fees in any state (without distinction between in- and out-of-network ATMs), as well as any overdraft fees. The institution sponsoring the account would be prohibited from sending debit or prepaid cards to students or parents until specifically requested, and schools would be barred from providing any information about students until after the institution receives affirmative consent to open an account. All cards also would be prohibited from displaying school logos, mascots or any other school identifying information.

Interestingly, direct deposit to a new or existing account is favorably positioned, as schools would be allowed to assist students (without any involvement from the financial institution) in opening new accounts that accept direct deposit.

Finally, the proposal acknowledges the DOE Secretary’s authority to make direct disbursements of title IV aid by adding a new provision stating that the secretary may pay, or require an institution to pay, funds directly to students or parents using a method established by the secretary.

For practical purposes, the proposal makes it impossible for an educational institution to offer students an option of establishing a sponsored account; thus limiting student choice, especially for  unbanked or underbanked students. And, opening the door to a government-sponsored account raises a host of problems, including disruption of the existing competitive market, forcing a one-size-fits-all approach to the varied needs of educational institutions and students across the country.

More information may be found here.