Who hasn’t cited the phrase, “If I could only be a fly on the wall for that conversation”?
Well, I recently had the opportunity to be that fly, so to speak. I live in the world of regulation and compliance, so I know firsthand that change is certainly a constant. Therefore, I was very appreciative to have the opportunity to be an observer at the recent sessions for the NRMC and thought I would share some of my notes and thoughts.
A Quick recap: The Department of Education(DOE) selected a committee to convene beginning in February 2014 with the purpose of drafting rules surrounding practices for disbursing federal aid and grants to student debit cards and other financial products. This is one topic among several on which the NRMC is focused, including requirements for obtaining PLUS Loans and distance education, to name a few. More information and specifics can be found on the DOE website.
Debit/Prepaid Card Confusion
There was confusion among the committee regarding the types of cards being used for refund disbursement. In fact, a document passed out by a committee member described the types of cards in the industry to try and help educate those in attendance, focusing on the difference between prepaid cards and checking account-based debit cards. One specific example was the fact that prepaid cards do not rely on individual checking accounts and therefore do not allow the student to overdraft and get penalized with NSF fees. Additional information discovered through that document review was that members did not have a full understanding of how tightly regulated prepaid cards are, as they are issued by a bank, specifically as they relate to Title IV regulations, which I will address in more detail later in this post. A significant amount of time was spent discussing specific checking account-based debit cards as have been cited in the news for unfair fee issues and ATM availability; less time was spent discussing prepaid cards solutions that meet and exceed benchmark’s set by the PIRG report, “The Debit Trap”, May, 2012, or NACUBO’s survey, “Student Refunds and Personal Banking at College and Universities”, October, 2012.
Based on these discussions, I believe more education and conversation is needed around the differential in high quality programs which meet existing regulations and benchmarks set by consumer advocates versus those cited in the press for unfair practices to ensure that proposed changes don’t accidently hinder these programs--programs which can be beneficial to both higher education institutions and students.
Un-bankable – What to do?
Many conversations centered around how to best serve the unbanked, unbankable, and under banked. How are these groups defined? “Unbanked” populations are typically multi-facets of students who choose to not bank at traditional banks. These “unbanked” also includes a subset of individuals that do not have social security numbers or have bad credit histories, known in the industry as “unbankable”. Finally, the “under banked” population consists of individuals that often purchase money orders, utilize check-cashing services, and pay bills in cash. Under banked and unbankable students may have 3-5% of their student refund, which can mean hundreds of dollars, eaten up in fees by check-cashing services and money order fees to pay bills. This led to conversations of how debit/prepaid cards truly help these students, suggesting that a final solution should include a card to cover this population gap.
Members from the consumer advocate groups stated their concern that school branded cards might be influencing the student to chose the card over other disbursement options such as direct deposit. As a counterpoint, some committee members expressed concern over regulations dictating when they can use their brand. A member from U.S. Public Interest Research Group (PIRG) stated she did not trust schools to negotiate a good deal for the students. Several schools rebutted the comment and stated that they understand the needs of their specific students and are diligent in the process, including having student council groups participate in the vendor and disbursement program selection process.
My opinion, based on this discussion, is that the committee really needs to think through the benefits of allowing schools to negotiate a contract that is in the best interests of students and to offer an affinity card which will be reviewed and regulated, versus the alternative scenario where students who may be uninformed about regarding financial literacy matters are left to their own devices to uncover an optimal solution.
Concerns were raised that schools may enter into arrangements where no on-campus access to ATMs exists for students, or ATMs are not conveniently located for students.
DOE regulations ensure students have convenient ATM access. They require that schools provide students with convenient and cost free ATM access at either institutionally owned and operated buildings, or facilities on campus or immediately adjacent to and accessible from campus.
Choice of disbursement options and default
Everyone agreed that while it was important for the disbursement options to be transparent, the school should have the decision on which disbursement options to offer to the students. Some schools did not want to offer check and only wanted to offer a prepaid card and direct deposit, in alignment with what government benefits offer with “Go Direct”.
Some members of the committee stated that the default payment method for Title IV funds should remain a written check. Unfortunately, this position does not consider the fact that a check is not the best option for every student.
Research studies1 show that many students will begin college without an existing banking relationship with a financial institution. Unbanked/under banked students, are faced with having to cash their Title IV funds at a check cashing location, where they will pay check cashing fees ranging from 3-5% of the amount of the check. After cashing the check, the student must then buy money orders to pay rent, bills, and utilities, or they could head all over town to pay bills in person with cash. Packed with inconvenience, security risks, and the possibility for fraud and loss, a cash-based system for personal finances is probably the most expensive way to handle personal financial services.
I would like to remind those considering these choices that, as compared to a check, a prepaid card offers the following benefits:
- Current DOE regulations mandate that the student or parent not incur any cost when opening the account or upon receiving any type of debit card, stored-value card, other type of automated teller machine (ATM) card, or similar transaction device that is used to access the funds in the account.
- Current DOE regulations mandate that the educational institution ensure that the student has convenient and free access on campus or immediately adjacent to and accessible from the campus. Some providers also add a surcharge network numbered in thousands of ATMs which covers remote learning, off-campus, or students travelling.
- The funds loaded onto the card are protected if lost or stolen. Like holders of debit cards, prepaid cards have the protections of Regulation E, as well as the zero liability policies of the card brands. Students are protected against lost or stolen cards, or unauthorized transactions.
- Access to funds is immediate once loaded to the card. There is no need for the student to pick up their check and find transportation to a check cashing location prior to having access to their funds, or to wait for funds to “clear” a checking account after a check deposit.
- Prepaid cards make bill payments and online purchases secure and easier for the student and provide access to the financial payments system.
Fees & card protection confusion
Statements were made that card solutions have high user fees, and hidden transaction costs. These are common misconceptions and there are strong arguments about why they aren’t true.
Existing DOE regulations (Title IV) specifically protects students from high user fees by ensuring that neither students, nor their parents, incur any fee in opening an account, receiving a card, or most importantly, in accessing the underlying funds at conveniently located ATMs on or adjacent to campus. Further, unlike with demand deposit accounts, most prepaid card holders are not subject to overdraft or NSF fees. Further, the Government Accountability Office (GAO2) stated in a recent report that the fees associated with debit and prepaid cards offered by colleges are generally in line with those on similar products offered by banks. With the exception of some providers, most prepaid programs often do not charge for point of sale PIN transactions.
DOE existing regulations also ensure no hidden transaction costs can occur. Prior to opening an account, the cardholder must be informed of the terms and conditions associated with accepting and using the account, including any fees and other costs associated with it. Moreover, as cards are subject to certain EFTA and Regulation E protections, prepaid card programs must provide students not only with full disclosures of all fees and costs associated with using the card, but also with a record of the student’s account transaction history that discloses any fees or costs charged in a given transaction period.
In closing, and in the spirit of true disclosure, I am an advocate of the prepaid card for tuition refund disbursements and feel it is important for both regulators and the marketplace to fully understand all the myths and facts about the “good, the bad and the ugly” with regards to prepaid and debit cards for college students. As with anything, we should all gather the facts and make informed decisions so that we can provide products services that will be in the best interest of the students we all serve.