Education Dept. Is Urged to Thwart Aid Abuses by Debit-Card Issuers

March 12, 2014

The Education Department should take steps to ensure that students are protected when colleges use third-party servicers, like Higher One, to deliver financial-aid refunds, says a new report by the department’s inspector general.

The report, which focuses on three colleges that use servicers to distribute leftover student aid, and one that offers direct deposit through an arrangement with a bank, says the colleges were doing little from 2010 to 2012 to monitor their contractors’ compliance with federal student-aid and privacy laws. The colleges were not preventing the servicers from steering students to their debit-card option, and sometimes participated in doing so.

Like the Government Accountability Office, which recently issued a report of its own on debit cards, the office of the inspector general also examined the fees associated with such cards, and the availability of fee-free ATMs to use them. It found that Higher One charged fees when students chose the "debit" option at checkout, rather than signing for a purchase. It also found that both Higher One and Sallie Mae charged three to four times as much as most banks to replace lost cards, and assessed fees on inactive accounts. While the two colleges affiliated with Higher One had fee-free ATMs on their campuses, the college then working with Sallie Mae did not.

The report also notes that conflicts of interest can arise when the servicers offer colleges bonuses based on the number of students who open accounts, likening the practice to the "inducements" that lenders once offered financial-aid administrators to recommend their products. The Education Department and Congress banned such revenue sharing several years ago, and the report recommends that the department do the same for debit-card agreements.

In other recommendations, the report urges the department to issue rules that:

  • Direct colleges to monitor servicers’ compliance with student-aid law and have a process to deal with student complaints about servicers.
  • Require servicers to provide students with objective information about their options for receiving federal student-aid refunds.
  • Require colleges to explain their choice of a servicer to students.
  • Ensure that servicers that offer debit cards do not charge fees for access to federal aid.
  • Define what constitutes "convenient" access to fee-free ATMs.
  • Prevent servicers from collecting personally identifiable information that is not necessary to distribute aid

In a response to the report, the department generally agreed with the recommendations and noted that it was drafting rules to deal with many of the inspector general’s concerns. The committee responsible for negotiating those rules meets again later this month.

In a written statement, Higher One said it had eliminated several fees since the inspector general’s investigation began, in the 2010 award year. Higher One has also updated its website "to give students a clearer picture of all their refund choices," wrote Shoba V. Lemoine, the company's communications director.

Correction (3/13/2014, 4:44 p.m.): Because of an error in the inspector general's report, this article originally stated incorrectly that Sallie Mae had charged fees when students used the "debit" option at checkout. That was true only of Higher One. The article has been updated to reflect this correction.