Proposed Rule to Bring More Oversight to Debit Card Providers Servicing Federal Financial Aid Recipients

Earlier this week, the U.S. Department of Education (DOE) published a Notice of Proposed Rulemaking in the Federal Register to amend the cash management regulations of the Student Assistance General Provisions regulations issued under the Higher Education Act of 1965, as amended (HEA). The department was prompted to issue the proposed rule after receiving a number of reports from government and consumer groups documenting a troubling pattern of practices being employed by some financial account providers, including:

• Providers prioritizing disbursements to their own affiliated accounts over aid recipients' preexisting bank accounts.
• Providers and schools strongly implying to students that signing up for the college card account was required to receive Federal student aid.
• Private student information unrelated to the financial aid process being given to providers before aid recipients consented to opening accounts.
• Access to the funds on the college card was not always convenient.
• Aid recipients being charged onerous, confusing, or unavoidable fees in order to access their student aid funds or to otherwise use the account.

The burden of the new regulations on post-secondary institutions largely depends on their current relationships with banks and debit card providers. For example, many large, public flagship institutions have revenue arrangements with banks and debit card providers. If an institution has such an arrangement, they will need to revise their contracts to comply with these regulations when they are made final.

The new regulations would:

• Explicitly reserve the right for the Secretary to establish a method for directly paying credit balances to student aid recipients.
• Establish two different types of arrangements between institutions and financial account providers, “tier one (T1) arrangement” and “tier two (T2) arrangement,” respectively.
• Define a “T1 arrangement” as an arrangement between an institution and a third-party servicer that performs one or more of the functions associated with processing direct payments of title IV funds on behalf of the institution and that offers one or more financial accounts to students and parents.
• Define a “T2 arrangement” as an arrangement between an institution and a financial institution or entity that offers financial accounts through a financial institution under which financial accounts are offered and marketed directly to students or their parents, with the regulatory consequences of T2 status to apply absent documentation from the institution that students or parents do not have credit balances at the institution.
• Require institutions that have T1 or T2 arrangements to establish a student choice process that: Prohibits an institution from requiring students or parents to open an account into which their credit balances must be deposited; requires an institution to provide a list of account options that a student may choose from to receive credit balance funds, where each option is presented in a neutral manner and the student's preexisting bank account is listed as the first, most prominent, and default option; and ensures electronic payments made to a student's preexisting account are as timely as, and no more onerous, as payments deposited to an account made available pursuant to a T1 or T2 arrangement.
• Require that the institution obtain consent from the student or parent to open an account under a T1 or T2 arrangement (1) before the institution shares personal information about that student or parent with the financial account provider, and (2) before the institution or account provider sends an access device to the student or parent or links the student's ID card with a financial account.
• Mitigate fees incurred by student aid recipients by requiring reasonable access to surcharge-free automated teller machines (ATMs), and, for accounts offered under a T1 arrangement, both prohibiting point-of-sale fees and overdraft fees charged to student and parent account holders, and providing students and parents with 30 days following a disbursement of title IV funds to access those funds without any fees.
• Require that contracts governing T1 or T2 arrangements and cost information related to those contracts are publicly disclosed.
• Require that institutions that have T1 or T2 arrangements establish and evaluate the contracts governing those arrangements in light of the best financial interests of students.

The proposed regulations would also:

• Allow an institution offering term-based programs to count, for enrollment purposes, courses a student is retaking that the student previously passed, up to one repetition per course, including when a student is retaking a previously passed course due to the student failing other coursework.
• Streamline the requirements governing clock-to-credit-hour conversion by removing the provisions under which a State or Federal approval or licensure action could cause a program to be measured in clock hours.

Comments on the proposed rule will be accepted until July 2, 2015 and may be submitted via the Federal eRulemaking Portal at www.regulations.gov or by Postal Mail, Commercial Delivery, or Hand Delivery to Jean-Didier Gaina, U.S. Department of Education, 1990 K Street NW., Room 8055, Washington, DC 20006. Crowell & Moring's Education and Public Policy Groups are available to answer questions or assist companies and post-secondary education institutions in drafting comments to the proposed regulations.