A recent US Senate Banking Committee hearing addressed issues that could determine the future of campus card bank partnerships. Though many expected ID cards and aid delivery to be a minor topic in comparison to other Title IV financial aid related issues, it dominated much of the discussion during the hearing titled “Financial Products for Students: Issues and Challenges.”
The following article highlights key testimony, including an opposition letter from the seven Kansas state system institutions, a US PIRG representative outlining the consumer advocate position against these accounts, and finally a banking association president’s case for the positives provided by bank and campus partnerships.
A video of the hearing and testimony is available at the following link. Jump 17:00 minutes into the video coverage to listen in on card-related issues. (http://www.banking.senate.gov/public/index.cfm?FuseAction=Hearings.LiveStream&Hearing_id=8058e98c-2c38-4e5c-999a-fdae0e929bc4)
At the start of the hearing, US Sen. Jerry Moran, R-Kan., read a letter submitted by the presidents of seven institutions in the Kansas state system. It stated their concern with language that regulates any arrangement in which a student opens an account into which the Title IV funds are to be placed.
Senator Moran read from the letter for the Kansas Universities:
“(This regulation) could have a chilling and in some cases terminal effect on good business partnerships that currently benefit students and universities alike.
Students often far from home need access to safe and secure financial services. Financial experience is a necessary part of student life and is essential training in long-term financial health.
Knowing this many schools have signed agreements with banks to provide on-campus financial institutions at low or no cost students. Such services include secure on-campus branches, ATMs, debit cards and financial education programs.
Any regulatory action that could potentially take away students safe convenient and free access to one group of essential services while it simultaneously drives up the cost of education for that same group of students deserves to be studied with extraordinary care.”
Christina Lindstrom, US PIRG spokesperson, highlighted what the consumer group sees as unfair and onerous for students:
“Right now students are being hit with high fees that are hard to avoid as they try to access their federal financial aid refunds through campus sponsored bank accounts and prepaid debit cards. We found in our 2012 report, “The Campus Debit Card Trap,” that two in five college students in the country are exposed to debit cards on campus that may drive up their costs.
Students at some campuses are charged steep and unusual fees to get to their federal financial aid including PIN transaction fees at the point-of-sale, overdraft fees of $37 or more. On the whole these accounts are not necessarily a better deal for students than what they might find through a bank not affiliated with the campus.
Still industry-leading banks and financial firms can see 40-75% of students on a campus using the campus-based product a few years of marketing. How do they do it?
First, banks and financial firms behind these products often rely on multi-million dollar revenue-sharing agreements with campus administrations. The contracts include receiving direct payment to use the school’s logo, providing bonuses for recruiting students and discounted pricing in exchange for marketing access.
In addition they used push marketing and other strategies to steer students into opening up these new accounts over using their existing bank accounts.
Higher One, a prominent financial firm in this market, pre-mails the cards to every student on campus, before they’ve opted in or out. The cards are co-branded with the college logo giving impression that the student must open the account.
At another college, bank representative actually set up tables right outside the student ID office, essentially … aggressively promoting their accounts that students can link to their id cards. Students can get freebies like bags and T-shirts for signing up.
Finally the fees can be high as I mentioned and unusual. Fees on university-sponsored cards include a variety of PIN swipe fees, inactivity fees, overdraft fees, ATM surcharges, fees to reload prepaid cards, fees to check your account balance … I could go on. The fees can be hard to avoid, for example, if a merchant only accepts PIN debit or there’s no fee-free ATM available.
All campus bank accounts and prepaid card services can charge overdrafts. Overdraft coverage is a form of credit since the financial institution covers the consumer shortfall and subsequently repaid the amount extended plus a fee. Some banks engage in the abusive practice of purposefully reordering transactions to maximize overdraft fees. Many banks and financial firms that are playing on campus right now have been held accountable for their abusive practices in this arena.
Overdraft fees are inconsistent with the Department of Education’s existing rules on school-sponsored accounts. Department of Education rules also require that students be provided convenient fee-free ATM access. In practice access can be limited.
One argument that’s being made in defense of these campus banking products is that too many low income students are not able to acquire a bank account other than on campus – these are the unbanked students. The Consumer Financial Protection Bureau found less than one-half a percent of college students in America are legitimately unable to secure a bank account, so new student who comes on the campus without a bank account – she doesn’t have one because she chose not to have one or she hasn’t gotten one yet.
Students do not need campus-sponsored bank accounts.
So I urge you to consider legislation that bans revenue-sharing agreements between colleges and banks or financial firms crafted specifically to offer bank accounts and related banking products to students on campus. The conflict of interest inherent in these accounts is problematic for the student consumer and it needs to be addressed.”
Richard Hunt, President and CEO, Consumer Bankers Association articulates the case for continuation of these relationships and accounts:
Some Consumer Bankers Association members have entered into agreements with institutions of higher education to provide useful services, such as campus ID cards that can be linked, at the option of students, to a standard deposit account. These financial institutions also provide important services, such as on campus financial literacy programs and assistance with financial aid systems to colleges and universities.
According to a GAO report, “Most of the college card fees we reviewed generally were not higher, or in some cases were lower, than those associated with a selection of basic or student checking accounts at national banks. In particular, college card accounts generally did not have monthly maintenance fees, while the basic checking accounts we reviewed typically did.”
Recently, the DOE entered into a negotiated rulemaking with a variety of stakeholders, including students, school representatives, banks, credit unions, consumer groups, and others, on the topic of “cash management,” which includes the disbursement of student aid refunds, federal aid in excess of what is needed to pay school charges. Despite significant progress among non-federal negotiators and the offering of good-faith proposals by the bank and credit union negotiators, consensus proved elusive. This leaves the Department unbound by any agreements worked out during the negotiations, and free to write whatever changes to the regulations it wishes to propose.
CBA shares the DOE’s goal of promoting students’ understanding and management of financial products while ensuring they have meaningful choices. However, we have serious concerns about and objections to the expansiveness of the draft regulation related to disbursement of federal student aid credit balances, particularly with regard to non-disbursement accounts (i.e. accounts opened outside of the Title IV credit balance disbursement process), as well as sponsored disbursement accounts. Similar apprehensions relating to the scope of the DOE’s rulemaking have been expressed by members of both parties and houses of Congress.
With regards to non-disbursement accounts, though the language in the draft regulation presented by the DOE during the negotiated rulemaking is not clear, it would certainly classify as “sponsored accounts” any traditional bank deposit account linked to a “campus card,” such as a college identification card, even though the depository institution offering the account does not facilitate the delivery of federal student aid credit balances for the school – which is the true subject of the rulemaking. In addition, the draft regulation could cover any deposit account that could receive federal student aid credit balance disbursements held by a financial institution that happens to have other types of arrangements with colleges or universities (“educational institutions”). As sponsored accounts, these accounts would be subject to various requirements and significant restrictions under the proposed regulation, impacting relationships that have nothing whatsoever to do with the disbursement of federal student aid credit balances.
While the DOE has authority to write rules concerning Title IV financial aid disbursement and the methods under which disbursements are made, the proposed rule would go beyond that scope and regulate the availability and terms of deposit accounts, including debit cards and prepaid cards, available to students from depository institutions – separate and apart from the financial aid disbursement process. We can identify no authority for DOE’s overreach to regulate deposit accounts that have, at best, only a tangential relationship with those accounts.
Moreover, and more importantly, this broad scope would have a chilling effect on the offering of accounts designed for students and would deprive students of choice and access to valuable, low-cost, and convenient access to bank services, accounts that can be especially useful to those students who arrive on campus without a bank account. For these reasons, we have urged the DOE to reconsider its draft regulation so it does not cover these traditional bank products and services to the extent they are offered outside of disbursement services (i.e., to the extent the deposit account opening process is not integrated within the federal student aid credit balance disbursement process).
In addition to our concerns regarding non-Title IV disbursement accounts and services, we are concerned the proposed regulation will effectively eliminate federal student aid credit balance disbursement accounts — that is, accounts specifically designed to disburse federal student aid credit balances—to the detriment of students and educational institutions.
Federal student aid is disbursed directly to colleges and universities, which use the funds to satisfy a student’s tuition expenses and then disburse the remaining funds to the student to be available for other appropriately related purposes. The DOE has issued a series of student aid credit balance disbursement regulations, which have increased the operational complexity of disbursing these funds to students. Financial service providers have partnered with educational institutions to help these educational institutions satisfy the DOE disbursement requirements. These arrangements enable colleges and universities to reduce the costs of disbursing federal student aid credit balances by utilizing direct deposit, rather than mailing paper checks, thereby decreasing costs for students and schools and provides to students, safe, quick, and convenient access to funds. In some of these arrangements, financial institutions may offer students a deposit account within the credit balance disbursement process itself or, when instructed by the educational institutions, provide them with a prepaid card to access federal student aid credit balances, particularly where a student does not have a pre-existing account to accept a direct deposit of funds. Most importantly, these products and services are always offered as options and are never a requirement. As evidenced by the chart below, institutions of higher education offer students a variety of options for receiving excess student aid funds. Paper checks along with ETFs to a bank account of the student’s choosing are the most prevalent methods for disbursing these funds.
For those students who do not have, or cannot easily access, an existing bank account, a letter from the National Association of College and University Business Officers (NACUBO) notes, “campus banking relationships can streamline the process of establishing a new account or a pre-paid card option provides an alternative to a check.”
The draft regulation presented by the DOE during the aforementioned negotiated rulemaking would effectively deprive students and educational institutions of these services by compelling financial institutions currently providing such “sponsored accounts” – including those in no way opened in connection with the credit balance refund process – to stop providing them to tens of thousands of students on multiple campuses. Draft regulation would restrict nearly all income sources associated with the maintenance and use of these products. With limited or no means to support the cost of providing the services, providers may have no choice but to exit the business and close existing accounts.
The result would be thousands of students losing a convenient, safe, and quick option to access their federal student aid credit balances, and the convenience of a single card that – at the election of the student – can combine financial and school functionality. Payments to students via checks would be more prevalent, especially for those without bank accounts, delaying the students’ access to the funds and potentially causing them to incur off-campus check cashing fees. In addition, it is worth noting the CFPB found that requiring disbursement through electronic fund transfer can reduce fraud and costs.
CBA is hopeful all involved in this process come to understand how banking relationships on campus provide students access to a range of financial products and options to meet their needs. It is especially important that the function of providing general financial services is not adversely affected by concerns over the separate issue of making federal aid funds available to students who wish to have funds deposited directly into a bank account, instead of being given cash or a check.”