Senate Passes Legislation That Includes Oversight of Private Loans, Debit-Card Fees

July 15, 2010

In a victory for students and college bookstores, the U.S. Senate gave final approval Thursday to a sweeping financial reform bill that will lower the fees colleges pay when students use debit and credit cards and increase oversight of private student loans.

President Obama is expected to sign the compromise legislation soon.

One of the biggest components of the bill is the creation of the Consumer Financial Protection Bureau in the Federal Reserve that will have authority over most consumer lending, including private student loans. The bill also creates an ombudsman position to oversee private student loans.

"This gives students a place to go to resolve issues with private student loans and to make sure students are protected moving forward," said Justin Draeger, president of the National Association of Student Financial Aid Administrators.

The bill would also require the Federal Reserve to set "reasonable and proportional" fees for transactions involving debit cards issued by banks with assets of more than $10-billion. That change was vigorously fought by credit-card companies like Visa and MasterCard, which now charge merchants "interchange" or "swipe" fees of about 1 percent to 2 percent of the transaction amount—often more than the actual cost of processing the transaction.

Richard Hershman, director of government relations for the National Association of College Stores, said college bookstores spend about $100-million each year on the fees, and they're often the second-highest cost for bookstores, behind labor.

"This gives opportunities to institutions to essentially offer discounts to students who use cheaper forms of payment, instead of charging convenience fees," Mr. Hershman said. "These costs that are going to credit-card companies aren't going to things like student services or lowering the cost of goods you're selling."

Advocates of reduced card fees and increased loan oversight didn't get everything they wanted in the bill, though, and they will now turn their focus toward the agencies that will be implementing the law. Mr. Hershman said interchange fees for debit cards should be eliminated because the cards are used like writing a check, which is free. He said he'll push the Federal Reserve to at least limit the fees to the cost of processing a transaction.

Because of the uncertainty surrounding much of the bill, including the reach and authority of the new consumer protection bureau, Edward L. Yingling, president of the American Bankers Association, expects more than 5,000 new pages of regulations.

He argued that while the bill would provide "needed reform," it was "overloaded with new rules and restrictions on traditional banks that did not cause the financial crisis."

Mr. Draeger, of the student financial-aid administration, said there will be a "competition for time" when lobbyists try to work with regulators during the rule-making process. He hopes to persuade the bureau to include a provision requiring private lenders to certify through borrowers' institutions that the students are eligible for the aid. Mr. Draeger said he believes this process would give colleges the opportunity to make students aware of all financing options, including federal loans.

"Not having that in the bill is an opportunity lost," Mr. Draeger said.