U.S. Proposes Rules for College Prepaid Credit & Debit Cards

Banks, Borrowing, Credit Cards, Fees, Student Loans

Banks constantly look to gain the loyalty of new customers. One great place for banks to find these ideal, new customers is at colleges, universities and other post-secondary educational institutions.

Students Make Easy Targets for Excessive Fees

Unfortunately, students do not pay much attention to their finances, especially when it comes to the fine print and fees that banks love. Financial institutions have been limited in their marketing efforts over the last few years through regulations found in the CARD Act passed in 2009, but banks still find ways to obtain new post-secondary students as customers.

Banks have recently turned to prepaid credit and debit card arrangements set up directly through the educational institutions that students attend. Some institutions go as far as having their student identification cards double as a prepaid credit or debit card, while others have arrangements to issue student aid refunds on prepaid credit and debit cards.

About 40% of all post-secondary students are enrolled at institutions that have an agreement with a bank regarding debit or prepaid card agreements. Those students receive billions of dollars in Pell Grant and Direct Loan program funds. Institutions often benefit financially through these arrangements. In fact, the top ten payouts to colleges were all over one million dollars each.

Department of Education Proposes New Regulations

According to a document published in the Federal Register on May 18th, 2015, the Department of Education has proposed new regulations to help protect students from predatory marketing and fees from banks while at their post-secondary institutions. In total, the proposed regulations are estimated to protect nine million students and over twenty five billion dollars of federal student aid.

The proposed regulations would not allow institutions to require students or their parents to open a particular account in order to have their credit balances deposited into that account. In addition, institutions must make sure that their students will not be charged overdraft fees if students pick an account offered, either directly or indirectly, by a contractor that assists the institutions in making direct payments of federal student aid funds.

The proposed regulations require institutions to provide a list of account options that students can choose from to receive their credit balance. The student’s preexisting bank account must be the default option and must be listed first and most prominently. All options must be presented in a neutral manner.

Finally, institutions would be required to process electronic payments made to a student’s preexisting account just as quickly as other options. At the same time, payments to a student’s preexisting account cannot be more onerous to the student than payments made to accounts marketed through the institution.

Upon initial inspection, most people would likely think these regulations should have already been in place prior to the recent proposal by the Department of Education. Sadly, these rules did not exist and are definitely needed to help protect students from the typical fees that prepaid credit and debit cardholders must usually pay. Fees are often charged in order for cardholders to access their money. They may include ATM fees, monthly maintenance fees and other obscure fees hidden in fine print.

The money that students often try to access on these cards is money they receive from a grant, scholarship or through a student loan. Students that end up paying these fees will ultimately have to borrow more money to pay for their post-secondary education at a time when student loan debt is already at surprising levels. Find out quickly at what rate you can refinance your student loan.

These new rules are currently only proposals and have not yet been enacted so make sure to look out for yourself or your students until the rules go into effect. The Department of Education is currently collecting public comments on the proposed rules for 45 days from the release on May 18th, 2015. We hope that the rules will go into effect in the near future to help protect students and the money they desperately need to finish their post-secondary education.

If you want more credit, check out MoneyTips’ list of credit card offers.

Illustration ©iStock.com/Shivendu Jauhari

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