The Department of Education recently proposed rules that would protect students from excessive fees and other predatory practices on prepaid and debit cards used to receive federal aid funds. The Department estimates that this proposal could protect as many as 9 million college students receiving $25 billion in federal aid.
Many colleges enter into marketing agreements with banks to promote their banking services on campus, often in exchange for financial benefits for the schools. These agreements may include provisions requiring students to receive federal aid disbursements on the banking partner’s prepaid or debit cards. According to the Government Accountability Office, at least 852 schools have agreements to provide debit or prepaid cards to their students.
While these agreements may benefit colleges, they are not always in students’ best interests. Agreements may prevent students from receiving aid disbursements to their preferred bank account. Colleges sometimes fail to provide clear and balanced information about students’ choices. Several Consumer Financial Protection Bureau (CFPB) enforcement actions show that these partnerships can result in driving students towards bank accounts and prepaid cards that are laden with fees and contain unsafe features.
The Department of Education’s proposed regulation contains a number of provisions that limit the worst practices in student aid card market, including:Prohibiting colleges from forcing students or parents to open a certain account as a condition of receiving aid
- Prohibiting overdraft fees on accounts from institutions that partner with schools to disburse federal aid
- Requiring colleges to clearly explain account options to students and parents in a neutral manner, including the students’ preexisting bank account as the first option
- Prohibiting colleges from penalizing students by delaying payments to accounts that are not affiliated with the school
The rule also contains limited protections for accounts that are linked to student ID cards, but are not used in the financial aid process. Unfortunately, these protections do not include a ban on overdraft fees, and we urge the Department to make student accounts safer by prohibiting overdraft fees on any accounts promoted by colleges.
The CFPB is also working to protect students from harmful student accounts by creating a Safe Student Account Scorecard. This voluntary scorecard would help colleges that are in the process of choosing a banking partner better understand how different proposals would help—or hurt—their students. We commented that, while the CFPB’s scorecard is strong, it could be further strengthened by asking prospective bank partners how they would encourage students to save and build credit and expanding the list of Safe Student Account features to include low minimum balance and opening deposits, rapid funds availability, a prohibition on deposit advance products, and more.
The CFPB is also in the process of writing rules on the broader prepaid card market. In our comments to them, we urged the CFPB to ensure that students are not coerced into using prepaid cards, require disclosure of alternative ways students can receive aid disbursement, and ensure that their rules do not preempt stronger state rules.
You can submit comments on the Department of Education’s proposed rules until July 2. For more information about ways to get involved with the rulemaking process, please sign up for our mailing list or follow us on Twitter and Facebook.