3 June 2020

Banking Programs For College Students

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Historically, banks and credit-card companies have eagerly courted colleges and their students, with questionable tactics, seeking to build lucrative, lifetime financial relationships with a captive audience.

Now, the government is one step closer to getting into that business.

This month, the Department of Education’s office of Federal Student Aid (FSA) released a request for applications from companies interested in participating in a pilot program offering students an account, card and other services co-branded with FSA.

The Department aims to make it easier for schools and students to deal with the loan funds left over after tuition and fees are paid, according to documents released last week. Right now, when a school receives student-loan dollars on behalf of a student in excess of tuition and fees, the school distributes that money to students in a variety of ways, including on prepaid debit cards and through manual checks.

Students and schools participating in the pilot program would have those funds put into an FSA co-branded account with a card and app attached. The app would then be integrated into the agency’s app. That app also includes the government’s application for financial aid and a portal borrowers can use to manage their student loans. Wrapping all of these things together with FSA branding “will bring into greater focus that the federal Government, through FSA, is the originating source of the student’s federal student aid,” according to the documents.

Companies participating in the pilot program would be prohibited from charging students fees and from assessing swipe fees on purchases made at school-owned outlets, like cafeterias or bookstores. And students would have to opt-in to specific requests to receive any marketing materials about other products.

Even though she’s encouraged by these consumer-friendly features, Colleen Campbell, the associate director for postsecondary education at the Center for American Progress, a left-leaning think tank, said she still has concerns about the pilot program.

One of the most basic: What does it mean that the government is essentially endorsing a financial institution to a group that’s in the best position of any demographic to create a lifelong financial relationship? “That’s a dangerous precedent to set,” she said. Documents surrounding the program released earlier this year noted that the payment vehicle “will in all likelihood, be the first financial services product introduced to a student which could then lead to a long-term, even life-long relationship for other financial services and products.”

Even though the physical and virtual cards that are part of the program will display both FSA’s logo and that of the participating financial institutions, Department of Education officials don’t see the arrangement as a real or perceived endorsement, Liz Hill, a Department spokeswoman, wrote in an email. It’s “no different than other government payment card options,” she said, including, for example, the Department of Treasury’s Direct Express MasterCard MA, -1.45%  , which is used to Veterans Affairs, Social Security and other benefits.

Campus banking history 

The controversy surrounding campus banking has also left consumer advocates skeptical of new developments in this space. Credit cards and bank accounts offered to college students have in the past been fraught with consumer protection concerns. Historically, regulation has been needed to prevent companies and schools from striking agreements that put students — a population often encountering financial products for the first time — at risk of fees and other predatory account features.

A set of regulations developed by the Department of Education in 2015 put stricter rules on these types of agreements between companies and schools, including a requirement that deals between banks and schools to market their products exclusively to students not be “inconsistent with the best financial interests” of students.

Despite these rules, which the Department of Education is charged with enforcing, a 2016 report from the Consumer Financial Protection Bureau found that many of these agreements failed to protect students from high fees.

That may still be going on. In his resignation letter from the CFPB in August, the bureau’s student-loan ombudsman, Seth Frotman, criticized the agency’s interim director Mick Mulvaney for suppressing a report “showing that the nation’s largest banks were ripping off students on campuses across the country by saddling them with legally dubious account fees.”

“Given that the former student-loan ombudsman at the CFPB resigned in part over the suppression of a campus banking report, we should be starting these conversations about this new debit card model with some caution,” said Kaitlyn Vitez, the higher education campaign director at U.S. PIRG, a consumer advocacy organization that has been investigating campus banking products for more than a decade.

FSA believes that there’s “great opportunity to provide a superior” product to students to hold and use their excess loan money, Hill wrote. Still, the pilot is “not meant to be an antidote to issues or concerns in the marketplace,” she added.

Will the no-fee model last 

For one, Vitez says she worries that the no-fee model won’t last beyond the pilot phase of the program.

It’s too early to tell whether those concerns are founded. Hill wrote in the email that the no-fee model “is a core principle” of the payment account vehicle program. “The pilot will be a ‘test-and-learn’ phase for FSA to assess potential strengths and challenges of introducing a Payment Vehicle Account program that will inform efforts to potentially take such programs to scale,” Hill wrote.

Vitez said she’s also concerned about how the financial institutions involved in the pilot will be able to use their access to this lucrative group of customers.

As part of the pilot, FSA is requiring the companies to collect aggregate anonymized data and report it to the agency periodically. The companies could use that information to better understand how millennials and Generation Z are spending money and market to them accordingly, Vitez said.

“That’s hugely important data that frankly a lot of people would pay money for,” she said.

Hill wrote in the email that use of any data associated with the program “will be restricted.” Customers would have to opt-in on a case-by-case basis to have their information used for marketing purposes.

Campbell said she’s concerned with how the government might use the data. If FSA gets a sense that students are spending financial aid dollars on items that they deem inappropriate, Campbell says she worries about the consequences.

“I am concerned that this is going to be used to buoy arguments about improper payments and misuse of federal student-aid funds and then that would be used as rationale to restrict federal aid to students,” she said.

Hill wrote that “it’s premature at this point to conclude if those reports will be used to inform policy.”

Finally, Campbell says she’s concerned about a future where FSA can claw back funds deposited from other sources, like a job, to repay borrowers’ delinquent student loans. Hill said that wouldn’t be the case. “The customer will always have 100% control of deposits and withdrawals from their account,” she wrote.

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