US proposes anti-steering rules on campus cards

Education Department rule would crack down on marketing, fees

Consumer advocates are applauding proposed new federal rules on student aid, saying they will block colleges from steering students toward fee-laden bank accounts that can deplete their financial aid dollars.

The Education Department proposed the rules May 15 involving campus-linked debit and prepaid cards. The cards give issuing banks marketing advantages for attracting students, in return for hefty fees paid to the college.

"The rule ensures that students are able to make their choice of where to send their financial aid dollars in a way that does not steer them toward one particular option over another," Christine Lindstrom,  higher education program director at the U.S. Public Interest Research Group, said a written statement. PIRG said it welcomed the proposed rule, but added that it failed to ban all overdraft fees on campus-linked bank accounts, an aim of consumer advocates.

Marketing deals for campus-affiliated cards are in effect at schools with over 9 million students, which receive $25 billion dollars a year in federal grants and loans, the government said.

The students "are a captive audience subject to marketing from their institution," and concerns about the practices warranted regulation, the proposed rules state. The rules made public Friday in the Federal Register have a 45-day comment period.

Some major provisions of the rule would:

  • Stop cards from being issued before students opt in to receive them.
  • Require that students' existing bank accounts be the default choice for depositing their aid money, not campus cards.
  • Block sharing of student information with banks before they have opted in to receive the card.

After the Credit CARD Act restricted marketing of credit cards on college campuses, college-linked debit cards have come under increasing scrutiny over their marketing practices and costs to students. The Government Accountability Office in a 2014 report called for more transparency of the deals between banks and colleges, and stronger rules to ensure students had a choice of how to receive their financial aid. That followed a 2012 crackdown by federal bank regulators on Higher One, the largest campus card issuer, and its banking partner over fees charged for overdrafts and inactive accounts.

During the comment period on the proposed rule, PIRG will continue to push for a ban on overdraft fees, which were restricted but not eliminated for all campus-affiliated bank accounts, Lindstrom said.

But the industry group Consumer Bankers of America criticized the rules, saying the costs of compliance will be passed along to students, further raising costs of attending college. "It is hard to believe Congress ever intended the Department of Education to wield authority over financial services," CBA President Richard Hunt said in a statement.

The Education Department is also considering distributing financial aid funds via debit or prepaid cards directly, the proposed rule said, similar to the way benefits such as some Social Security payments are distributed by the Treasury. Currently, schools are responsible for sending students the balance of their financial aid funds, after tuition and fees are deducted.  The department "will continue to explore whether such a card would be beneficial to students and parents," the proposed rule states. 

See related: Campus cards generate big rewards, but not for cardholdersHigher One grows to dominate college debit card market 

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Updated: 02-18-2019