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US Department of Education Proposes Rules to Better Protect College Students, Federal Financial Aid Dollars

Thursday, July 2, 2015

The comment period on the US Department of Education proposed rule governing college-bank marketing partnerships closes on Thursday, July 2.

CRL senior policy counsel Maura Dundon submitted comments to the Department and offered the following remarks:

The Department of Education's proposed rule governing college-bank partnerships is a good first step towards protecting students from unfair marketing practices and overdraft fees – but more must be done to ensure that federal financial aid disbursement does not become a way to unfairly add to college coffers and bank bottom lines.

A way to get federal financial aid funds into the hands of students is quickly becoming an avenue to market high-cost accounts to a captive campus of consumers. Colleges are increasingly entering into marketing agreements that allow banks exclusive access to market their accounts to the student body. Today, 40% of students attend a college with an agreement in place. In return for providing exclusive access and marketing assistance, colleges get a share of the bank's fee revenue from the accounts or other financial benefits.

In some cases, colleges have allowed the process of financial aid disbursement, which they outsource to a third-party company, to be turned into an opportunity to market bank accounts. In other cases, colleges allow banks to administer student ID cards and, in the process, market bank accounts as being tied to the ID card. Both types of arrangements are directly tied to the school's role in disbursing federal financial aid dollars.

Many of the accounts marketed to students under college-bank marketing agreements are saddled with abusive fees and terms, such as overdraft fees. These features often make the accounts worse than other alternatives on the open market. Fortunately, the proposed rule would eliminate the worst fees on the accounts offered by companies that perform the school's disbursement functions, including a ban on overdraft fees.

In addition to abusive fees, banks and their partners have been known to utilize deceptive marketing techniques to induce students to open accounts. There are multiple examples of banks misleading students into thinking that an account was the only way to receive their student loans in a timely manner or suggesting that the account has been sanctioned by the school. Some of these instances were so egregious that they are now the subject of bank regulator enforcement actions and a major multi-state class action.

While the proposed rule would also eliminate unfair marketing practices on the accounts offered by companies that perform the school's financial aid disbursement functions, it fails to extend these protections to accounts offered at other points in time--such as accounts offered in conjunction with student ID cards. Full protections should be extended to both sets of accounts, since they are both intertwined with federal-aid disbursement.

As stewards of the federal financial aid process, colleges have a responsibility to act in the best interest of students when they transfer federal grant and loan money. The financial aid disbursement system should be a way that students can access the promise of higher education, leading to better personal, economic, and professional outcomes. It should not become a marketing opportunity for predatory banking products.

For more information, contact Catherine An at catherine.an@responsiblelending.org or 202-349-1878.