Negotiators Clash Over Student Debit-Card Fees

March 28, 2014

College and consumer groups clashed over the U.S. Department of Education’s plan to regulate campus debit cards at a rule-making session here on Thursday, with one side accusing the agency of limiting student choice and the other praising it for protecting consumer interests.

At issue was a proposed rule that would make direct deposit the default for distributing student-aid refunds and would ban many of the fees associated with college-affiliated debit cards.

Under the draft rule, released last week, colleges would have to request that students use their personal bank accounts for receiving refunds before suggesting a sponsored card. If they offered such a card, they would have to ensure that students did not incur any overdraft or ATM fees when accessing their aid.

More than 850 American institutions have agreements with banks or other financial companies to provide debit- or prepaid-card services to their students, and most allow students to receive federal student-aid refunds on the cards. The fees associated with such cards are generally in line with those on unaffiliated products offered by banks, although most banks don’t charge for purchases made with a PIN, as some college cards do.

At Thursday’s session, consumer-group representatives on the negotiating panel said the changes would ensure that colleges weren’t steering students to products that benefited colleges more than students. They said that while the cards have improved in recent years, many of the "bad practices" identified in recent reports by the Education Department’s inspector general and the Government Accountability Office are still taking place.

"Students are being funneled into certain accounts," said Maxwell J. Love, vice president of the United States Students Association. "Any unique or higher fees should be eliminated."

Limits on Fees

But panel members representing colleges and card issuers said the changes would make it impossible for them to offer the cards to students. They argued that students need to have some skin in the game, and urged the department to limit the number of fee-free withdrawals students could make instead.

"There’s no way our institutions are going to be able to cover the fees without passing them on to students" in the form of higher tuition, said Melissa F. Gregory, chief enrollment-services and financial-aid officer at Montgomery College, in Maryland. "It’s going to eliminate it as an option."

Paul J. Kundert, president and chief executive of the University of Wisconsin Credit Union, said barring all ATM fees would make students insensitive to the costs of multiple withdrawals, and warned that financial institutions couldn’t absorb the fees either.

Casey McGuane, chief operating officer of Higher One, the dominant provider of campus-based cards, said forcing colleges to offer direct deposit first would conflict with the draft rule’s requirement that students be offered their refund options in a "neutral" and "objective" manner.

Department officials appeared open to the idea of limiting–but not eliminating–ATM and overdraft fees, asking panelists what number they would allow. John Kolotos, a department official, said he was sympathetic to the argument that sponsored accounts may be the best choice for students, in some cases.

But he defended the department’s decision to make direct deposit the default, saying too many colleges have made agreements that lower their student-aid servicing costs at the expense of students.

"What we’ve seen is a cost shift from institutions to students," he said.

Negotiations will continue on Friday, with panelists set to discuss recent changes in the underwriting criteria for Parent PLUS loans. On Thursday the department released data that showed that default rates in the program, while higher for parents than for graduate students, are still lower than rates in the Stafford student-loan program, across all higher-education sectors.