Second draft of DOE regs remain troublesome for industry’s future

Chris Corum, Editor & Publisher

After the Durbin Amendment passed in 2010, fee income for banks offering debit cards was significantly reduced. It took just months for totally free consumer checking accounts to virtually disappear. So too went many of the rewards programs and other perks for consumer debit. The lesson was clear … when regulation removes money from one area it has unforeseen consequences, and most often the consumer feels the pinch.

So too will these changes to the campus banking accounts force a pinch that will ultimately be felt by the end consumer – the student. If campus financial accounts are squeezed too tightly, students will ultimately pay higher fees, have reduced choices and experience lower levels of both service and convenience. Additionally, they will miss out on opportunities to learn about money management through real world experience and organized financial literacy efforts provided through these partnerships.

The second draft of Title IV program changes from the Department of Education’s Negotiated Rulemaking effort was released on April 16. While there is some good progress toward the goal of protecting Title IV funds while giving students choice, there are still a number of issues with the latest draft regulations that could drive financial institutions out of the market.

Colleges and universities will also almost certainly see increased cost to distribute financial aid balances, but additionally they will also pay more to conduct a host of other functions. Delivering student payroll and other refunds not associated with Title IV funds will cost more; rental income from bank branches and ATMs will reduce or cease; financial contributions or revenue share from banking partners will go away forcing card programs to find other ways to meet budget shortfall; marketing assistance from partners will reduce forcing card programs to pay for all efforts or go without.

A bank or third-party servicer, like any other for profit business, must make money to offer a service. If regulations make a service unprofitable, providers simply exits the market in favor of another.
So what is problematic about the current draft rule changes?

A key area of concern is found in the section on sponsored accounts. A sponsored account is defined as one created via a contractual agreement between an institution and a bank, third-party servicer or other entity. It may be an account associated with a campus ID card; an account independent of a campus ID but branded and/or associated with the college; a prepaid card provided by the contracted company assisting with financial aid distribution, etc. If the institution has any relationship with the account, it is likely a sponsored account.

If that sponsored account “could” possibly receive Title IV funds – and virtually any account could if the student opted to specify it as their account of choice – then a series of restrictions are placed upon the account.

Some of the restrictions make sense and are good changes in spirit. Three distinct rule changes, however, seem likely to make it difficult and/or unprofitable to offer services campuses and students have come to rely on today.

Number One – ATM fees

With regards to ATM transaction fees, the new requirements would be costly to providers and could likely force some or all to abandon the market for sponsored accounts. The language includes:

“Must ensure that the debit card, prepaid card, or access device associated with the account belongs to a surcharge-free national or regional ATM network that has ATMs on or near each campus.” Also, the accounts must ensure that the student does not incur any cost associated with using the card “to conduct up to four cash withdrawals per month or statement cycle at any out-of-network ATM.”

There is no account available in the market – with the possible exception of those offered to select high net worth clients – that includes free out-of-network ATM transactions. Why should these accounts be held to a different, unreasonable standard?

Number Two – Inactivity or termination fees

Another prohibition on account fees makes it difficult for providers to clear unused accounts off of systems, something that is burdensome and costly over time. Proposed language states that students should not incur any cost associated with “maintaining the account, such as a monthly maintenance fee, inactivity fee, or account termination fee.” These fees enable institutions to get forgotten, unused accounts of systems eliminating ongoing year after year costs to perpetually maintain every opened account.

Number three – No sharing of FERPA-acceptable data

For third-party servicers to help institutions collect data on which options students select – for example, ACH, card, check, etc. – they must at least know the names and basic coordinates for aid-receiving students. Proposed language, however, prohibits this process stating that institutions, “may not share with the entity any information about the student or parent until the student or parent makes a selection.”

This puts the onus back on the institution to aggregate all student choices first and then pass this information along to a servicer. Existing FERPA regulations govern data that institutions can share and this has long been an accepted and regulated practice.

A better way?

It seems that a final section of the proposed language would in-spirit accomplish the goals of the entire effort – protecting student Title IV funds and maximizing choice – without attempting to crystal ball the future and set limitations that penalize sponsored accounts in favor of all other accounts.
The final paragraphs of this section read:

“(ix) Must ensure—

(A) That the circumstances and terms of the financial account afford the student or parent a reasonable opportunity to withdraw or expend the total amount of Title IV, HEA program funds deposited or transferred to the financial account without incurring any cost, fees or charges and provide the student or parent with clear and timely instructions as to how that may be done; and

(B) That any other fees or charges assessed to the student or parent that are not otherwise prohibited in this section are reasonable. A fee or charge is reasonable if it is a commonly assessed fee in the industry and is comparable to, or less than, the fees usually charged for that item or service.”

If this language was to be kept as the sole verbiage for the section on sponsored accounts, it would seem to accomplish the goal without killing the market and ultimately hurting the very students the effort is intending to help.

Supporting resources and documents:

• Second draft of proposed rule as a marked-up word doc, Department of Education Negotiated Rulemaking, April 16, 2014

• Stand up for your industry: DoE’s reg draft would cripple campus cards, CR80News, March 27, 2014

• Financial aid and card regulations: The clause that could spell trouble, CR80News, March 25, 2014