Note: The content contained in this blog post is for informational purposes only and it does not, and is not intended to, constitute a legal opinion or legal advice and should not be relied upon as such.
Since the Negotiated Rules Committee last spring, 2014, proposed rules from the Department of Education (DOE) have been much anticipated. TMS has had a front row seat in Washington, sitting in to observe the negotiated rule making sessions and interacting with many of those involved in crafting the recommendations to the DOE.
The following is a summary of the May 19, 2015 release of the DOE’s proposed rules to amend the cash management regulations under the Higher Education Act of 1965.
The comment period for the Proposed Rule ends on July 2, 2015.
As the proposed regulations could have an impact to both the way that your office currently manages your Title IV refund process as well as to the students you disburse these funds to, the DOE has invited you to share your thoughts and have your voices heard during the remaining days of the comment period. We have condensed the 296 pages of the DOE’s proposal, however to read full proposal rules as well as comment online click the link below:
While there are some influences from the Negotiated Rule Making Committee efforts back in the Spring, 2014, there are some significant new directions the DOE has taken on these final rule proposals. Specifically, an introduction of two different types of college accounts defined with different requirements based on your University’s partner’s role. Many of the requirements follow that of good existing card programs (i.e., unbiased choice, surcharge-free national ATM network); however, further understanding of a new 30 day period restricting fees following a Title IV disbursement will need to be better defined. Uninhibited use of features of an account in the 30 days falls away from teaching students good financial literacy. Most adults cannot find financial accounts offering that level of access without significant balances including the Federal Direct Express® Debit MasterCard® card. It may make it difficult for some programs to provide the great number of features the students benefit from today. There is also further understanding needed around the ability to share data for proper authentication of students during the disbursement and selection process in order to prevent fraud or misrouting of student funds.
The expected timeline for the new regulation to be formally published is by November of this year, in order for it to take effect July, 2016. TMS remains committed to provide you with timely updates and information as the final regulations and requirements unfold.
Department of Education Proposed Rule Summary
The Department of Education (DOE) has attempted to future proof the rules by using the term “Access Device” throughout the proposal. An access device is essentially anything that can be used to link or access a financial account (i.e., Bank Checking Accounts, Prepaid Debit Cards) for electronic funds transfer. That means student IDs that can be linked to bank accounts such as a checking account or even a prepaid card are access devices. In addition, they want to make sure that it would also capture new technology such as virtual cards linked to mobile phones.
The requirements of the Proposed Rule apply to financial accounts offered to students or parents by a college or university. The DOE has defined two types of arrangements, Tier 1 or Tier 2, to which funds provided under Title IV of the Higher Education Act are disbursed.
Tier 1 versus Tier 2 Arrangements
Tier 1 arrangements refer to an arrangement between a School and a third-party servicer (as defined under current DOE regulations) that performs one or more of the functions associated with processing direct payments of Title IV Funds on behalf of the School and that offers one or more financial accounts to students and parents.
Tier 2 arrangements refer to an arrangement between a School and a Financial Institution (FI), or entity that offers financial accounts through an FI, under which financial accounts are offered and directly marketed to students or their parents. Direct marketing under the Proposed Rule includes: (1) communicating information directly to students or their parents about the financial account and how to open it; (2) co-branding a financial account or access device with the School's name/mascot/logo or other affiliation; or (3) linking a card or tool provided to the student or parent for institutional purposes (e.g. student ID card) with a financial account or access device.
However, if a School can demonstrate that no student or parent received Title IV Funds to such an account, the School does not have to comply with the requirements of the Proposed Rule.
Student Choice Process
For both Tier 1 and Tier 2 arrangements, Schools are required to establish a choice process under the Proposed Rule:
- A student’s or parent’s preexisting account must be listed as the first, most prominent, and default option for payment
- Student’s or parent's options for receiving payment are presented in a clear, fact-based, and neutral manner
- Students or parents must be informed in writing that they are not required to open or obtain a financial account or access device in order to receive Title IV Funds
- Schools cannot require any extra steps for the student or parent to elect their existing account and be able to change their account preference upon reasonable written notice.
- The School must provide the major features and commonly assessed fees of Tier 1 and Tier 2 accounts as well as a URL for the terms and conditions of the financial account;
- The School may, in its discretion, provide information on other available financial accounts; and
- The School must list issuing a check as an option for a student or parent to receive their payments.
Student or Parent Consent
Under both Tier 1 and Tier 2 arrangements, the Proposed Rule requires a School to obtain student or parent consent (i.e. Can be an electronic check box on an electronic conspicuous form) to open a financial account before (1) sharing personal information of the student or parent with the financial account provider (other than name, address, and e-mail); and (2) sending an access device to the student or parent, or linking the student's ID card to a financial account.
Fee and other Restrictions
Tier 1 Requirements
- Students or parents must have access to regional or national ATM networks located on or near each location of the School; there must be an adequate number of ATMs maintained so that sufficient funds are reasonably available.
- Students or parents must incur no cost for:
- Conducting transactions at ATMs belonging to the surcharge-free network,
- Opening the financial account or receiving an access device,
- From the School, third-party servicer, or the third-party servicer's associated financial institution when conducting a point of sale transaction; (i.e., No PIN transaction point of sale fees)
- From the school, third-party servicer, or the third-party servicer's associated financial institution for 30 days from the time Title IV Funds are deposited or transferred (does not apply to third-party fees such as ATM surcharge-fees); (i.e., Card Account provider can’t charge a fee to recoup the fees they are charged by the ATM owner)
- The financial account and access device must not be marketed or portrayed as a credit card and must not be convertible into a credit card; and
- No fee can be charged to the student or parent for any transaction that exceeds the balance of the financial account
Tier 2 Requirements
Under Tier 2 arrangements, the following fee restrictions and requirements apply:
- Students or parents must have access to regional or national ATM networks located on or near each location of the school,
- There must be an adequate number of ATMs maintained so that sufficient funds are reasonably available
- Students and parents must incur no cost for opening a financial account or receiving an access device;
- The financial account and access device must not be marketed or portrayed as a credit card and must not be convertible to a credit card.
Contract Disclosure Requirements
Under both Tier 1 and Tier 2 arrangements, the Proposed Rule states that, no later than 60 days after the most recently completed award year (monetary and non-monetary), a School must provide the DOE, and disclose conspicuously on the School's website, the contract between the school and FI or third-party servicer. The contract must be displayed in its entirety except for portions that would compromise personal privacy, proprietary information technology, or the security of information technology or of physical facilities.
Additionally, a summary must be provided to the DOE and similarly posted on the School's website containing the total consideration for the most recently completed award year (monetary and non-monetary) paid or received by the parties under the contract, the number of students and parents who had accounts under the contract at any time during this period, and the mean and median of actual costs incurred by those account holders.
Finally, the School must submit to the DOE a URL for where the contract and summary can be found on the School's website, which the DOE will then make publicly available.
Best Financial Interest of Students
The Proposed Rule requires Schools to ensure the terms and conditions of both Tier 1 and Tier 2 arrangements are not inconsistent with the best financial interests of students. To comply, Schools must do the following:
- Periodically conduct due diligence to ascertain whether fees imposed are, as a whole, not excessive in light of prevailing market rates;
- Provide that contracts to market or offer financial accounts to students allow the School to terminate based on complaints received or a determination that the fees imposed are excessive;
- Take affirmative steps, including contractual arrangements if necessary, to ensure requirements of the Proposed Rule are met.
Ownership of Student or Parent Financial Accounts
Under the Proposed Rule, financial accounts must either be in the name of the Title IV Funds recipient or meet the four requirements of the FMS Treasury rule.
Miscellaneous Proposed Requirements
Sweeping of Accounts
The Proposed Rule notes that, currently, funds that would otherwise remain idle in one or more operating or depository accounts of an FI are swept overnight into savings accounts, money market mutual funds, or other securities. The Proposed Rule would prohibit this practice to the extent these accounts contain Title IV Funds. For any accounts holding Title IV Funds, the FI must ensure that those funds are not swept or otherwise placed at risk of financial loss.
Crediting of Student Accounts
Under the reimbursement and heightened cash monitoring payment methods, Schools must first credit a student's ledger account for the amount of Title IV Funds they are eligible to receive and pay any credit balance due before seeking reimbursement from the DOE.
Schools must hold Title IV Funds in a depository account insured by the FDIC of NCUA or the equivalent if the funds are held in a different country.
Some content sourced from National Branded Prepaid Card Association.