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GAO Urges Debit Card Changes

February 14, 2014

WASHINGTON -- The U.S. Government Accountability Office on Thursday urged federal policy makers to tighten the regulations on campus debit cards and require disclosure of the agreements colleges have with the companies that offer such products.

The recommendations, which were part of a 15-month Congressional study of campus debit cards, were released less than a week before the Education Department is set to begin negotiations over its regulations that govern the cards. 

The department, the report says, should create a clearer definition of what constitutes “convenient” access to fee-free ATMs on campus and also require colleges and debit card providers to give students “neutral information” about their options for receiving federal grants and loans reimbursements. The GAO further recommended that Congress require the disclosure of agreements between debit card providers and colleges, some of which have involved financial kickbacks and revenue-sharing.

The report looked at debit cards that are offered to students as a way to access the money left over from grants and loans after paying tuition and other fees. Colleges and the debit card providers have hailed the arrangements as a cost-efficient way for campuses to process financial aid disbursements and a convenient way for students, especially those without a checking account, to receive their refunds. But consumer advocates, several lawmakers and federal regulators have questioned a range of practices in the industry.

Congress in 2009 passed legislation requiring credit card companies to disclose their agreements with colleges to the federal regulators, and the Consumer Financial Protection Bureau now posts those contracts in an online database.

But that level of transparency doesn’t apply to campus debit cards, to the chagrin of Senator Tom Harkin of Iowa and Representative George Miller of California, two Democrats who have been pushing for tighter regulation of the products.

“Congress curbed aggressive and lucrative marketing on these products, but financial institutions are now back on campus,” the pair said in a statement. “They are pushing debit cards arrangements that are once again great for banks and great for colleges, but can be terrible for students.”

Harkin, who chairs the Senate education committee, requested the GAO report.

The GAO study found that at least 852 colleges and universities -- which collectively enroll 40 percent of all postsecondary students -- had agreements to provide debit or prepaid card services to their students as of last July. The largest provider of debit cards, the GAO found, was Higher One, which held 57 percent of the agreements.

Congressional investigators said they identified concerns in three areas: fees, ATM access, and the quality of information provided to students.

Most of the fees on campus debit card accounts were largely comparable to basic student checking accounts at national banks, the report found, with the exception of fees for purchase made using a PIN number. For instance, the two largest campus card providers -- Higher One and Citibank -- charge 50 cents for transactions that use PINs rather than signatures, a fee that doesn’t exist on the other checking accounts that the GAO reviewed.

Many of the campus debit cards also charge fees for accessing funds from out-of-network ATMs, the report said. Education Department regulations currently require debit card providers to offer “convenient access” to fee-free ATMs

“[T]he information presented at some schools appears biased toward encouraging students to choose the college card over other options, and [the Department of] Education’s guidance does not address the responsibility of schools to provide objective and neutral information to students about their financial aid payment options,” the report says. “As a result, some students may not be getting information that enables them to adequately assess whether a college card best meets their individual needs and preferences and is the most cost-effective choice among all options for conducting financial transactions and receiving student aid.”

U.S. PIRG, the consumer advocacy group, which has been critical of the practices of debit card providers and the colleges that contract with them, praised the GAO report and its recommendations.

But the group wants the department to take a firmer stance in adopting new regulations on the debit cards, according to Christine Lindstrom, who directs U.S. PIRG’s higher education program.

“We’d like to be much stronger on the question of fees,” she said. “The GAO is questioning the legitimacy of some of the fees but our stance is more unequivocal, that students should not be charged any fees to access their federal financial aid.”

Lindstrom also said that she would like to see the Education Department end what she called “push marketing” of the debit cards, in which co-branded cards are mailed to all incoming students and advertised as the best way to access financial aid.  

In fact, she said, most students would benefit most from having their financial aid refunds deposited directly into their existing bank account.

In addition, Lindstrom, who will represent U.S. PIRG during the department’s rulemaking session,  said she would be calling for the departments to end revenue-sharing agreements for campus cards. Though the practice has recently become less prevalent as a result of public pressure, she said, it creates a conflict of interest for colleges that should be prohibited.  

In a statement responding to the GAO report, Higher One noted its "continued opposition" to revenue-sharing agreements, which the company has said are not a part of any new contracts it signs with colleges.

“As the GAO noted in its report, Higher One has already made considerable changes to ensure our student account offerings are fair, fully transparent and result in students receiving their financial aid reimbursements quickly and in the way they want it,” said Casey McGuane, the company’s chief operating officer. “These services remain at the forefront of removing financial barriers to higher education.”

The Education Department will address regulations on campus debit cards next week as it begins a several-month negotiated-rulemaking process. A panel of negotiators will meet in Washington D.C. to hammer out new rules on debit cards, among other topics on the administration’s regulatory agenda.

The department has not previously detailed how it plans to address campus debit cards in the rulemaking. But in responding to the GAO report released Thursday, the department wrote that the negotiated-rulemaking panel would discuss both the issue of convenient access to fee-free ATMs and how debit cards options are presented to students. 

 

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