Billions of dollars in federal aid are disbursed to students each year, and not only for tuition; students often borrow up to the “cost of attendance,” (as determined by the school) to pay for housing, food, and other necessities. When this happens, the U.S. Department of Education disburses funds to the school, which then disburses the balance – minus tuition and fees – to the student. For this reason, many schools have entered agreements with financial institutions to provide banking services to students, many of whom do not have strong banking relationships when they enter college.
The Department has alleged various abuses stemming from these arrangements, and in May proposed detailed rules to regulate the way financial services are provided and marketed to students. There would be two sets of rules – a stricter set for “Tier 1” arrangements, in which financial institutions process federal funds, and a less strict set for “Tier 2” arrangements, in which financial services are marketed through schools to students and parents. In July, Massachusetts AG Maura Healey joined the call to regulate, in particular praising five proposed measures:
- Presenting a list of account options to students, and making disbursements to different accounts – including a student’s pre-existing account – in an equally timely fashion. As part of the presentation, institutions would need to disclose and summarize agreements with financial services providers.
- Limiting fees and providing ATM access. While the proposed rule contemplates establishing a minimum number of ATMs available on campus, Healey argued that the Department should instead issue guidance to schools on ensuring adequate ATM access; setting a minimum, she charged, “could risk creating an artificially low bar.” Healey also argued that the proposed limit or ban on overdraft fees should be made stricter, and applied to both Tier 1 and Tier 2 arrangements.
- Requiring more conservative management of federal funds; under the proposed rule, institutions would have to maintain such funds in insured depository accounts. Healey acknowledged that the risk of loss of such funds in other accounts “may be remote,” but maintained that the “rigorous regulatory requirements” imposed on insured accounts were necessary.
- Allowing the Department to establish a method of direct payment to students. Healey argued that the Social Security Administration has been able to make direct payments since 2013, and urged the Department to implement a similar model.
- Requiring schools to itemize charges deducted from student aid proceeds and explain how inclusion of each charge is in the student’s best financial interest. Healey alleged this would prevent schools from “automatically lumping books and supplies into tuition and fees,” reducing the portion of aid proceeds that is disbursed to students.
All of the Commonwealth’s many postsecondary schools – and their financial service providers – should watch these regulations closely, and expect that the AG will be watching too.