The Obama administration on Tuesday completed its long-awaited crackdown on companies that offer debit cards and other financial products on college campuses, finalizing federal rules that ban certain fees, impose new marketing restrictions and require more public disclosures.
The new regulations, most of which take effect next July, will affect how millions of students at thousands of colleges and universities gain access to their federal financial aid. The rules also require colleges for the first time to publicly disclose the agreements they have with financial institutions to market products on campus that are often branded with a university’s logo or mascot.
Ted Mitchell, under secretary of education, told reporters Tuesday that the rules were meant to “rein in troubling practices” that have cropped up in the market for student financial products. Among the problems, he said, were unusually high fees and a lack of transparency in the arrangements between colleges and financial account providers.
The administration’s regulations target two categories of financial accounts offered to college students.
Some Fees Prohibited on Debit Cards
The most stringent restrictions apply to debit and prepaid cards that colleges use to disburse federal grants and loan funds to students. Colleges typically contract out this work to third-party providers like Higher One.
Under the new rules, those debit card providers will not be allowed to charge point-of-sale and overdraft fees. And the providers will be required to provide students with at least one “convenient mechanism” to withdraw the amount of their federal financial aid without charge, such as fee-free ATM withdrawals.
Department officials originally proposed a 30-day window in which students would not be subject to any type of fees on the account in which their federal aid was deposited. The final rules instead require one fee-free method for accessing the financial aid money.
Changes for Other Campus Financial Accounts
A second category of products that fall under the new rules are financial accounts that are not necessarily associated with financial aid but that are nonetheless marketed directly to students on a campus.
Those accounts must now offer “reasonable access” to ATMs that allow students to withdraw money without paying a fee. Products used by fewer than 3 percent of a campus student body are exempt from the requirement.
Ban on Aggressive Marketing
Both types of accounts will face a slew of new marketing restrictions. For instance, companies will not be able to push students into their products by automatically enrolling students using data provided from their colleges.
Debit card providers will also no longer be allowed to make their product the most prominent option listed for how students receive their financial aid. The rules require that students be presented, in neutral language, with a choice in how they want to receive their aid dollars, including a direct deposit into their existing account.
New Transparency Measures
Colleges will also have to publicly post on their websites the contracts they have with campus debit card providers as well as any other financial institution marketing products directly to their students. The Education Department plans to create a centralized database of links to where those agreements are posted on colleges’ sites.
In addition, colleges will have to disclose each year the mean and median costs that students incurred while having the debit card or other financial accounts.
Reactions to the Rules
Consumer advocates praised the new regulations as much-needed protections for students. But banks and other financial companies, which lobbied against the regulations, said the Education Department overstepped its authority in regulating financial products.
Christine Lindstrom, director of the higher education project for U.S. PIRG, which has long been pushing for tighter rules on campus debit cards, said the new fee prohibitions would lead to “huge cost savings for students.”
“The new rule is a victory on all counts for students against the banks,” she said. “The Department of Education delivered a decisive victory for students today that’s going to make real differences in their lives.”
Meanwhile, Richard Hunt, president and chief executive officer of the Consumer Bankers Association, suggested the Education Department had overstepped its powers.
“While we are still reviewing the final rules, what is being veiled as pro-consumer reform is far from it,” he said in a statement. “The banking industry is heavily supervised by numerous regulators that specialize in financial products and services, so it is hard to believe Congress ever intended the Department of Education to wield authority over banks.”
While much of the rule will take effect on July 1, 2016, some of the disclosure requirements for colleges will be delayed until 2017.