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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