Every year, millions of students borrow federal loans to cover college expenses. For many, this money is crucial for more than just tuition. It helps these students stay in school by paying for food, rent, transportation and other living costs. But lately, this money has also become the lifeblood for predatory card vendors that gobble up funds with unnecessary, exploitative and hidden fees.
Although the U.S. Department of Education has taken recent action to eradicate the worst practices companies use to cut into students' pocketbooks, it is not enough. The government should expand the disbursement options available to students to include the Treasury Department's DirectExpress debit card.
At issue are student aid "refunds" — typically grant or loan dollars left over after a student has paid tuition and fees, which often help with living expenses. College students with a bank account can deposit the refund with minimal issues. But many students have no experience with or access to mainstream financial products. While more than half of all new college students already have an account, that is compared to nine out of ten adults overall in the U.S.
When students do not already have their own bank account, they often find themselves at the mercy of the account vendor their college chooses to use.
And here the problems arise. Processing aid refunds has become a big business in recent years. In exchange for disbursing the excess federal aid dollars at a school, vendors often receive preferred access to students to market their financial products, whether through school email addresses or at orientation events. A 2014 Government Accountability Office report estimated that 40% of American college students were enrolled at an institution with such a contract.
Companies have used the captured market of a college campus to sell products that might otherwise be unviable.
Some of these vendors have used their exclusive relationship with a college to soak students with high fees that gobble up their money. Prior to the Department of Education's latest rules, vendors chosen by a college could automatically disburse student funds to high-fee cards. While that will be prohibited this coming school year, some companies will still be able to use their relationship with the college to market otherwise non-viable, high-fee products to students.
For example, Higher One, the largest provider of student aid refunds, charges students 50 cents for each debit transaction on its student checking account — an unusual nickel-and-diming practice. In December, the company agreed to pay $55 million to hundreds of thousands of students to settle allegations of deceptive marketing practices and failure to disclose fees.
Recognizing the problem with refund middlemen, the Department of Education issued rules last fall to level the playing field for students using debit cards on college campuses by banning some of the most egregious practices. College refund vendors can no longer charge students a fee every time they use a refund disbursement card for a PIN transaction in stores. And students must receive neutral information about disbursement options, such as the choice to send refunds quickly to their own bank account, instead of being forced into using an expensive product of the college's choice.
While the regulations provide much-needed protections, the government should take another step to bypass the middlemen entirely by allowing students to use an existing federal product known as the DirectExpress card. Administered by the Treasury Department, this card is used by about 5 million Americans to distribute many types of federal government payments, such as Social Security or Veterans Administration benefits, to individuals without bank accounts.
DirectExpress is specifically designed to be consumer-friendly, safe and convenient to use. Piloting an expansion of the DirectExpress card to some college campuses would test whether this service allows students to affordably access needed aid funds with minimal work for colleges.
Many of the existing benefits and terms of the DirectExpress Card are in line with the Education Department's new rules. For example, the DirectExpress Card does not charge a fee for debit or credit transitions at retailers that accept MasterCard debit cards. Users can also get free cash back when using a PIN at many retailers, like grocery stores. And unlike other banking products, DirectExpress offers guaranteed eligibility for anyone receiving federal funds.
That said the Department of Education would need to adapt the terms of the DirectExpress card to better meet the needs of college students. DirectExpress was created for individuals who receive recurring payments; one drawback is that the card allows for only one free ATM withdrawal per month. To make the card consistent with the new rules for college refunds, students would need to have greater access to free withdrawals in the first 30 days of a semester.
The DirectExpress card provides an introduction to reliable financial products for individuals new to banking. Students can get and use refund money without needing to find a bank account right away, and learn to make the money last until the end of term. In fact, DirectExpress recently introduced an app to help users track their spending. Then, as they become more accustomed to available banking options, they can open an account that fits their specific needs.
Whether it's a textbook or the bus fare to get to class, financial aid refunds provide students with resources that enable them to be successful while enrolled in college. Yet unfair fees cut into the money they sorely need. Offering DirectExpress as one option for college students can help make sure refund money is secure, accessible and all theirs.
Elizabeth Baylor is the director of post-secondary education at the Center for American Progress. Joe Valenti is the director of consumer finance at the Center for American Progress.