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U.S. Toughens Rules on Debit and Prepaid Cards for College Students

The U.S. government is reforming the way banks market debit and prepaid cards to college students, eliminating several "troubling practices."
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The federal government is reforming the way banks market their debit and prepaid cards to college students.

The U.S. Department of Education issued new regulations on Tuesday to eliminate “unreasonable fees” and stop many “troubling practices” that are common with these cards.

Education Secretary Arne Duncan said the new rules, which take effect July 1, 2016, will “bring overdue reforms to campus cards, a sector that too often puts taxpayer dollars and student consumers at risk.”

The government estimates that nearly $25 billion in federal student aid is now issued on campus debit and prepaid cards annually. About 40 percent of all college students – about 9 million – now attend a school that’s partnered with a bank to provide financial aid this way.

The schools are often highly compensated for these exclusive marketing agreements, and have not been required to disclose that information.

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But under the new rules, these contracts – including the fees received and the average fees charged to students – will be publically available.

Other changes under the new rules:

  • Students can freely choose how to receive their federal financial aid.
  • They must receive objective and neutral information about their disbursement options.
  • They cannot be charged “excessive and confusing fees” to access this aid money, such inactivity and point-of-sale swipe fees.
Consumer groups happy; bankers are not

Consumer advocates applauded the new regulations. They’ve been lobbying the government to crack down on campus banking practices for years.

The new rules should stop colleges from joining forces with banks and their affiliates to push students into “high-fee bank accounts that siphon away their financial aid money” through overdraft and usage fees, said Maura Dundon, senior policy counsel at the Center for Responsible Lending.

Lauren Saunders, associate director at the National Consumer Law Center, said greater transparency “will help fix a broken system where some schools put revenue-sharing deals ahead of the interests of their students.”

Christine Lindstrom, director of the U.S. PIRG Higher Education program, said more than 2 million students should start saving money in the second half of next year. She called the new rules “a big victory” for them.

Frank Keating, president and CEO of the American Bankers Association said he was “disappointed” by the government’s action and he predicted that the new rules will “exacerbate, not resolve, concerns” related to student access to financial aid and banking products.

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“Students benefit from the low-cost and convenient financial products made available through arrangements between educational and financial institutions,” he said in a statement. “The rule imposes a new and burdensome layer of regulatory complexity and uncertainty that may drive financial institutions to abandon the student bank account market, reducing competition, availability and choice for students.”

One caveat

The new rules do not provide the same level of protection for campus bank accounts not related to financial aid disbursements but linked to student ID Cards.

Those accounts will also be required to provide reasonable access to free ATM withdrawals, but they can continue to have overdraft fees. Students should check the fee schedule before activating a debit card tied to their campus ID.

Herb Weisbaum is The ConsumerMan. Follow him on Facebook and Twitter or visit The ConsumerMan website.