WASHINGTON The Education Department's plan to tighten restrictions on deals between banks and universities sparked a fierce debate Friday over whether such rules are long overdue or a significant overreach.
On the one side were consumer advocates, which praised the proposal, arguing that its ban on overdraft fees from student loan refund accounts would save students hundreds of dollars each year.
"Colleges should be looking out for their students' best interests, not helping banks skim off their student loan funds with bank fees," said Maura Dundon, senior policy counsel for the Center for Responsible Lending.
Lauren Saunders, the associate director of the National Consumer Law Center, said the plan is "sorely needed to fix a broken system where some schools put revenue-sharing deals ahead of the interests of their students."
But industry representatives said the plan went too far and questioned whether it was even legal.
Nessa Feddis, vice president and deputy general counsel for consumer protection and payments at the American Bankers Association, said the proposal's restrictions far exceed the scope of the problem that it purports to solve. The plan would bar colleges from requiring students to open a campus debit or prepaid account with a specific bank or financial institution in order to receive their federally backed loan reimbursements, or even suggesting that those accounts are required.
But Feddis said campus debit and prepaid cards are often cheaper for students and even usually operate on a loss for banks. Banks provide those services because they want to build banking relationships with young people that will remain in place as they get older, she said.
By placing unnecessary restrictions on those products, the Education Department is effectively punishing an entire industry because it uncovered problems at one institution.
"Everything is based on a single entity that had some problems that the regulator solved," Feddis said. "It's not clear what they're solving for. The system worked."
The Education Department's proposal cited legal actions against Higher One, a financial intermediary that held 57% of the market share in the campus debit card market as of 2013, according to a February 2014 report by the Government Accountability Office. Higher One and partner banks settled complaints with the Federal Reserve and the Federal Deposit Insurance Corp. in recent years concerning their campus debit card products.
Moreover, Feddis and others questioned the Education Department's legal power to act. Feddis said that the department is not a bank regulator and has no authority to regulate financial transactions. Once their loans leave the department, they lose jurisdiction, Feddis said, and the Consumer Financial Protection Bureau or some other regulator would be responsible for detecting and punishing illegal behavior, not the Department of Education, Feddis said.
"They have no authority based on the plain language of the statute," Feddis said. "There are agencies who can already address issues, starting with the Bureau. There's basically duplicative efforts which is another reason demonstrating their lack of authority."
Feddis would not speculate as to whether a lawsuit would result if the proposal were finalized as drafted, but she did say that "there certainly will be a solid basis for doing so."
Richard Hunt, the president of the Consumer Bankers Association, agreed.
"The banking industry is heavily supervised by numerous regulators that specialize in financial products. It is hard to believe Congress ever intended the Department of Education to wield authority over financial services," Hunt said in a statement.
Under Title IV of the 1965 Higher Education Act, the Department of Education is authorized to lend directly to students and also to guarantee low-interest loans offered by banks and other private lenders. The department issues around $137 billion each year in combined direct and guaranteed lending for students pursuing higher education. The banks or the government pays the college for tuition, and the schools then disburse leftover funds to the students themselves, either through a check, ACH deposit or through a specially designated debit or prepaid card account.
Federally guaranteed loans behave differently than other kinds of debt, however. They can never be discharged in bankruptcy, and they have no statute of limitations. The amount of outstanding student debt in the U.S. has gone from roughly $260 billion in 2004 to over $1.1 trillion last year, and the rate of default on student loans has hovered around 14% in recent years, according to the Education Department.
CFPB Director Richard Cordray said Thursday that the growth in student loan leverage bears "an uncanny resemblance to the situation where struggling homeowners reached out to their mortgage servicers before, during and after the financial crisis."
The proposal would bar any college-endorsed debit or prepaid account from incurring overdraft fees. Banks also are barred from prioritizing student loan payments to their own accounts over those of other financial institutions under the proposed rule, and students must have "reasonable access" to surcharge-free ATMs in which to access their funds.
In the proposal, the Education Department said that it had received scores of report on arrangements between colleges and banks where the student's loan funds were channeled through prepaid cards or even student identification cards managed by specific banks or institutions. Other cases were documented where students without the accounts at the preferred bank received delayed payments, and students who did have accounts with the preferred provider "being charged onerous, confusing, or unavoidable fees in order to access their student aid funds or to otherwise use the account."
Much of the proposal appears to relate to the actions of Higher One, however. In 2012, the Federal Deposit Insurance Corp. reached a settlement with The Bancorp Bank in Wilmington, Del., and Higher One over its OneAccount program.
The FDIC said in announcing the settlement that Higher One and Bancorp Bank violated the Federal Trade Commission Act's ban on unfair or deceptive practices by "charging student account holders multiple insufficient funds fees from a single transaction; allowing accounts to remain in overdrawn status for long periods and allowing these insufficient funds fees to continue accruing; and collecting the fees from subsequent deposits to the students' accounts, typically funds for tuition and other college expenses."
The companies agreed to pay $11 million in restitution to roughly 60,000 customers, and Higher One paid a $110,000 fine. The Bancorp Bank paid a $172,000 fine to the FDIC for its participation in the program. Higher One also agreed to settle a class action suit based on the same allegations in November 2013 for $15 million.
Last July, the Fed hit Cole Taylor Bank of Chicago with a $3.51 million fine for its oversight of "deceptive practices" undertaken by Higher One connected to its OneAccount program. The Fed alleged that HigherOne misled students into thinking they could not receive their loan funds without opening a OneAccount account, omitting information about fees and the location of surcharge-free ATMs.
A spokesperson for Higher One said the company is "reviewing the proposed rule to understand its implications" and that it intends to "share our thoughts and feedback with the Department of Education in the days and weeks ahead." The Fed also said in announcing last year's settlement that Higher One "is taking material corrective action to address these practices in its current disclosures to students."
Consumer advocates, however, said the problems in the industry go beyond just one firm.
"These are problems that have received attention for a number of years, but we have not had any serious efforts to address them before now, so it's an important step in addressing an ongoing problem," Saunders said. "We've had discrete enforcement actions taken against some of the actors, but it hasn't stopped problems, and so rules to create clear rules of the road for fair products is important."