Viewpoint: Dept. of Education Student Debit Card Report Doesn’t Make the Grade

By Brian Tate, Network Branded Prepaid Card Association

Heading to college is all about the quest for knowledge. Part of that process is learning to use fact-based, impartial research to reach educated conclusions. Unfortunately, the March 10 Department of Education’s Inspector General’s report, “Third-Party Servicer Use of Debit Cards to Deliver Title IV Funds,” doesn’t make the grade.

In short, the report focuses on student card programs from Sallie Mae and Higher One at only four colleges and makes several sweeping recommendations to reform the distribution of Title IV funds based on the findings from this exceptionally small sample. There are a number of shortcomings in the report, and the Network Branded Prepaid Card Association (NBPCA) advises against implementing the report’s recommendations to the entire student cards industry. In rebuttal to the report, we’d like to highlight four key facts:

Fact One: The report examines less than 1% of student card programs

The Inspector General did not review enough student card programs to determine where, when or if improvements need to be made on a large scale basis. In fact, the report analyzed less than 1 percent of student card programs. Only four schools were examined. According to the Government Accountability Office, there are currently 852 colleges and universities with card agreements.

The report even discloses its own shortcomings, noting “specific results obtained at the schools and servicers in our review may not be representative of the actual circumstances at other schools or servicers.” And, “we judgmentally selected and performed limited work at three schools that contracted with third-party servicers.” In addition, “we performed only limited work to corroborate the amounts and figures presented in the report.”

The report contains no underlying statistics or facts to support its assertions, nor does it cite research from or outreach to banking regulators or industry for more information. Further, the Inspector General doesn’t list any research from federal prudential banking regulators (such as the Federal Reserve, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation or National Credit Union Administration) or third-party reports from banking trade associations.

It’s clear the report is based on limited data from which it isn’t reasonable or statistically valid to draw conclusions and make recommendations to apply to the entire industry.

Fact Two: The industry hasn’t been accused of any widespread wrongdoing. So, why the suggested overhaul?

It would make sense for an industry that has received significant complaints from consumers and/or has been accused of pervasive wrongdoing or illegal activity to be examined. This protects us all.

However, the Inspector General’s report doesn’t cite a wave of student complaints or other supporting factors for this review. In fact, it states “officials at the three schools had not received many student complaints regarding delivery of Title IV funds.” The report then asserts, without foundation, that there may be complaints from students that aren’t being addressed.

The report alleges that marketing used by Higher One and Sallie Mae could be misleading and potentially in violation of Department of Education regulations. This statement, however, is not supported by facts. Nor does the report cite any student polling regarding their attitudes and experiences with prepaid cards.

Why recommend major changes when students and educational institutions are satisfied with the product?^[1]

Fact Three: Student cards are already heavily regulated

Student cards that disburse Title IV funds, are heavily regulated through the following existing federal protections:

• Student consent: Schools must obtain consent from students or parents to open a bank account or load funds onto a student card.
• FDIC insurance: The FDIC or NCUA must insure the funds deposited onto the student cards.
• Account fee limits: Schools must ensure students or parents do not incur costs when opening accounts, receiving student prepaid cards, or delivering funds.
• Regulation E protection: Applies to every student card and provides for initial disclosures, error resolution notices, periodic statements and limitation of liability for unauthorized transactions among other protections.
• Convertible to cash: Student cards must be convertible to cash and widely usable. Schools must ensure students have convenient and free access on campus or immediately adjacent to campus.

Fact Four: Student cards provide important benefits to students and schools

Like all prepaid products, student cards provide users an efficient, convenient and cost-effective way to manage and move funds. For colleges and universities, the cards provide a less expensive option than issuing paper checks.

Indeed, the report details the benefits that schools and students receive from outsourcing disbursement services (i.e., cost savings, efficiencies, accounting, quicker disbursements, etc.). The report even acknowledges that, when presented with a choice, “most students chose the debit card option.”

For students, the cards provide value, convenience and safety in several key ways:

• The funds loaded onto the cards are protected if lost or stolen. Student cards have the consumer protections of Regulation E, as well as the zero-liability policies of the payments networks. Students are protected against losses arising from lost or stolen cards and unauthorized transactions.
• Access to funds is immediate once loaded to the card. There is no need for students to pick up their checks and travel to check cashing locations to pay a 3 to 5 percent fee to access their money or to wait for funds to “clear” in checking accounts.
• Student cards make bill payments and online purchases secure and easier for students and provide access to the financial payments system for those without access to bank accounts.
• As noted by the Government Accountability Office, student card fees are comparable to similar products provided by banks. Student cards may provide a more cost-effective and safe solution for students versus checking accounts, because they are protected from overdraft fees and minimum monthly balance requirements.

The NBPCA promotes complete transparency of the terms associated with student card programs and never condones marketing tactics intended to trick or deceive students in any way. It’s important for students to examine all their financial services options and make the right choice depending on their specific needs and sensibilities. The NBPCA has an active interest group focused solely on these products along with leading practices that have been shared with members, industry leaders, media and third parties. There should be transparency in the relationship between colleges/universities and their financial services providers. (And students or parents should be made aware of such relationships.) Student cards also must comply with all state and federal banking and consumer protection laws and regulations.

The industry wants to partner with regulators, schools and students to continuously improve student cards and solve problems if they exist. And, the NBPCA supports research that has a legitimate purpose when a clearly defined problem has been raised, provided that research questions are informed and valid, the research is fair and defensible, and a statistically significant sample is used to draw accurate conclusions on which meaningful and useful recommendations can be based for the benefit of all parties.

Brian Tate is the NBPCA’s director of government relations. A graduate of the Howard University School of Law, the George Washington University (M.A.) and King’s College (B.A.) in Pennsylvania, Brian was a White House intern during the Clinton Administration in 1996. Prior to joining NBPCA in 2013, he was vice president of banking at the Financial Services Roundtable. He began his career in financial services working as an advocate for the credit union industry. Brian may be reached at [email protected].