Cash Management Rule Maximizes Student Access to Financial Aid Dollars
By Joe Valenti and Elizabeth Baylor
This first appeared on americanprogress.org
In July, the Center for American Progress submitted comments to the U.S. Department of Education regarding its proposed rule on program integrity and improvement, which deals with financial products offered on college campuses. Read the full comment letter here.
Young Americans are disproportionately disconnected from the financial mainstream. The share of Americans ages 15 to 24 without bank accounts is double the national average, and they are often more likely to use high-cost or predatory financial products. As such, early bad experiences in the financial marketplace can have consequences over a young person’s lifetime. The financial products offered to college students have long been problematic. The Credit Card Accountability Responsibility and Disclosure Act, or Credit CARD Act, of 2009 largely addressed abusive credit card marketing partnerships on college campuses that led students to take out cards even though they often were unable to pay back the debt. Now, the Department of Education proposes to take student consumer protections one step further by cracking down on abusive banking products tied to accessing student aid funds, making sure that student accounts are not gobbled up by fees.
Because the cost of attending college includes more than just tuition, many students on American campuses pay for other educational expenses—such as room and board, books, supplies, and transportation—through credit balances or refunds from federal loans or Pell Grants. These refunds often are delivered electronically through partnerships between institutions of higher education and financial institutions. Yet these powerful relationships may not always be in students’ best interests due to preferential arrangements or unusually high fees.
Agreements between universities and cash management vendors often grant companies a captive market in which to sell their products. For example, Higher One Inc., a cash management vendor that serves more than 5 million students, states, “Our higher education institution clients provide us with student email addresses that we commonly use to communicate with students about our products and services.” By design, these contracts are a means for companies to sell other financial products. As Higher One says, “[O]ur relationships with Refund Management disbursement service higher education institution clients provide us with a market for OneAccounts, from which we derive a significant proportion of our revenues.” However, some of these other products have terms and fees that are not comparable to the best options in the market. For example, Higher One’s basic OneAccount checking account, while it has no monthly fee, charges students point-of-sale fees for purchases, an uncommon practice among debit card products.
Meanwhile, model payment cards already exist, such as the DirectExpress Card, a virtually fee-free debit card that the U.S. Treasury currently uses to distribute many federal government payments. Products marketed to students should reflect high-quality options such as these, instead of expensive products that do not serve students well.
The proposed rule would take several steps to rebalance the playing field in favor of students and families.
Provide equitable and convenient access to refunds
Under the proposal, students and parents must be allowed to select affirmatively the best option for receiving their money, including in their own bank accounts, rather than being required to divert funds to an account or access device determined by their college or university. Most importantly, this would end the practice of providing faster or lower-cost access only to sponsored products, such as accounts tied to a student ID card or branded with the university logo.
Ban fees for banking products tied to refunds
Student accounts would no longer be allowed to incur any fees within the first 30 days, such as account-opening or activation fees, and point-of-sale fees for purchases would be banned. Banking products with these fees syphon aid dollars away from students and likely would not be viable in a competitive marketplace. Under the rule, one category of disbursement products—those delivered through cash management vendors, also known as Tier 1 products—also cannot contain credit options such as overdrafts, lines of credit, or the potential marketing or converting of these products to credit cards. This provision would ensure that these accounts are not a backdoor pathway to harmful credit products that might otherwise be banned.
Ensure that students have ready access to cash
Students must have access to surcharge-free national or regional ATM networks that are convenient to campus in order to obtain cash easily and affordably. The rule mandates that “ATMs located on campus must be sufficient in number and reasonably accessible, as determined and documented by the institution,” which ensures that this access is provided. No-fee ATM access has been a persistent issue not just with student cards but also with other payment cards, such as payroll cards and public benefit cards.
More can be done
Despite these important steps forward, the Department of Education’s proposed rule could be improved to better protect students and increase transparency.
Expand favorable terms to all college banking products
All co-marketed or co-branded campus banking products should have the same protections—including banning overdraft and other atypical credit features—not just the Tier 1 products mentioned above. Since multiple banking products may feature a college or university logo, students and parents should not have to identify a specific product type in order to determine its consumer protections. Additionally, students should have a free and convenient mechanism to receive the full balance of their account by cash or check when it is less than a de minimis amount, such as $20.
Increase transparency of colleges’ relationships with banks
Institutions of higher education should be required to send contracts governing their disbursements of student aid funds to a central repository. Additionally, the Department of Education should annually collect and publish data that detail the presence of campus banking products and how each college or university handles disbursements.
The Department of Education’s proposed rule is a major step forward to expand transparency and consumer protections for parents and students who use financial products associated with a college or university. It aims to provide equitable and convenient access to refunds and works to eliminate predatory banking products that may erode the value of these refunds through excessive fees. These consumer-friendly practices will help students and their families make better financial choices, both while enrolled in college and in the future.
Joe Valenti is the Director of Consumer Finance and Elizabeth Baylor is the Director of Postsecondary Education at the Center for American Progress.