New Department of Education Regulations Aim to Protect Student Borrowers
Posted By Derek Johnson on November 17, 2015 at 11:19 am
The federal government took a series of actions last month designed to better protect student borrowers. The Department of Education announced changes to two federal regulations that affect the financial aid process. One of these changes tightens restrictions around fees for school-sponsored prepaid debit and credit cards, and the second revises Pay As You Earn rules to qualify millions of additional borrowers for income-based student loan repayment.
The credit and debit card rule changes are designed to address a series of problems highlighted in a Government Accountability Office report last year, which looked into the growing use of pre-paid debit and credit cards offered to on-campus students. Colleges often partner with banks and other financial institutions to provide these cards. It’s a growing industry, and the report found that approximately 40 percent of the more than 25 million higher education students in the country attend schools that offer such services.
Students use the cards to purchase items at campus bookstores, restaurants and other stores. Additionally, in the event that a student has financial aid funds left over after paying for tuition and other fees, colleges will offer to place the remaining balance on these cards.
New rules for college-sponsored prepaid debit and credit cards
While most of the providers offering these cards applied transaction fees consistent with other banking products, the largest among them (Higher One) was the subject of a large FDIC fine and enforcement action in 2012 for “unfair and deceptive” marketing practices regarding their student debit card program. From the FDIC press release announcing the action:
“The FDIC determined that Higher One operated its student debit card account program (OneAccount) with The Bancorp Bank in violation of Section 5. Among other things, the FDIC found that Higher One and The Bancorp Bank were: charging student account holders multiple nonsufficient funds (NSF) fees from a single merchant transaction; allowing these accounts to remain in overdrawn status over long periods of time, thus allowing NSF fees to continue accruing; and collecting the fees from subsequent deposits to the students’ accounts, typically funds for tuition and other college expenses.”
Higher One was hit with a class-action lawsuit from affected students and eventually settled out of court for $15 million. Last year, they were served with another class-action suit from shareholders “less than two weeks after the company announced that a regulatory action related to marketing language and lack of disclosures in 2012 and 2013 could become so costly that it could default on $94 million in loans.”
The company is by far the largest provider of student debit cards, with the report estimating that it holds a 57 percent market share. New rules released last month prohibit companies like Higher One from charging excessive fees and require universities and their partners to provide neutral and unbiased advice to students about their financial aid banking options, rather than steering them towards the university’s preferred plan.
Secretary of Education Arne Duncan hailed the updated rules in a statement, saying the students and borrowers were the administration’s top priority since “day one” and calling the rise of prepaid debit and credit cards “a sector that too often puts taxpayer dollars and student consumers at risk.”
Revised Pay As You Earn
The revised Pay As You Earn (or “REPAYE”) rules will open up income-based repayment to an additional five million students nationwide, to allow them to pay only a manageable percentage of their monthly income towards student loan debt. It will also mandate that lenders and collectors provide information up front regarding a student’s options and eligibility for the program.
Many student borrowers with heavy debt burdens have complained that they were not told that they were eligible for income-based repayment. The Department of Education’s rulemaking panel approved the expansion this past March following an executive order signed last year, with the interceding seven months dedicated to fleshing out and finalizing the specifics.
In explaining his reasons for the order expanding the program, President Barack Obama framed the rising use of income-based repayment as a way to ease student’s overall debt burden.
“The outrage here is that they’re just doing what they’ve been told they’re supposed to do. I can’t tell you how many letters I get from people who say, ‘I did everything I was supposed to and now I’m finding myself in a situation where I’ve got debts I can’t pay off,” Obama said in 2014.
Critics of income-based student loan repayment programs
However, the policy is not without its critics. A New York Times report in 2013 found that even if students use PAYE and REPAYE to lower their monthly contribution and achieve total loan forgiveness after paying for a certain number of years, the interest on that forgiven debt continues to accrue, and the total is taxed by the federal government as a gift. That can lead to potentially huge sums of money down the road.
Melinda Lewis, University of Kansas professor and co-author of “The Real College Debt Crisis: How Student Borrowing Threatens Financial Well-Being and Erodes the American Dream,” called income-based repayment an example of a well-meaning policy with unintended consequences. By paying lower monthly rates, borrowers are also leaving more money to collect interest, a tradeoff that can leave them on the hook for thousands, or even tens of thousands more over 10-25 years.
“You’re seeing effects over the long-term away from asset accumulation and towards debt maintenance,” said Lewis. “We’re pushing student debt out 15 years or longer, seeing people who are at the point where they need to think about their children’s higher education while trying to figure out how to purge the last vestiges of their own debt.”
In addition to expanding REPAYE, the Obama administration released a report at the beginning of October seeking to lower the legal standards for student loan borrowers to declare bankruptcy. Unlike many other forms of debt, it is extremely difficult to meet the requirements for bankruptcy from student loan debt.