By Kate Sablosky Elengold and Seth Frotman | May 7, 2021
It is clear that Secretary Cardona has his work cut out for him as he attempts to turn around the Department of Education (ED) and refocus it on the critical task of protecting students and student loan borrowers.
From restoring the broken promise of Public Service Loan Forgiveness to correcting harms that Betsy DeVos levied on defrauded borrowers and overturning the obstructive guidance that the Trump Administration used to block oversight and accountability of the student loan industry, there is no shortage of areas in which immediate corrective action is badly needed to begin righting the historic wrongs of the last four years. The devastating fallout of the COVID-19 pandemic for students and borrowers makes the demand for this work all the more pressing.
One key area where reform and strengthened consumer protections are needed is the market for school-sponsored prepaid cards and debit cards linked to deposit accounts (“campus cards”). These cards are meant to help students conveniently access money from federal student aid left over after tuition and fees are paid, including books and housing. Regulators, lawmakers, and consumer advocates have all warned that industry regularly sneaks in excessive and unfairly structured fees that can cost students hundreds of dollars a year. ED put rules on the books to create guardrails against many of the most egregious fees and tactics in the space in 2015, but ED’s weak implementation of these standards has so far allowed extensive borrower harm to continue.
A legal memorandum published today by the Student Borrower Protection Center and the Consumer Financial Transactions Clinic at the University of North Carolina School of Law proposes clear steps that the Department of Education (ED) can take to end the abusive practices that remain all too common in the campus card market. This memorandum outlines a more robust interpretation of the 2015 “best financial interest” standard—the standard intended to protect students and rein in colleges when negotiating agreements with third-party financial institutions. Our memorandum concludes that existing regulations, paired with updated guidance to schools, are capable of finally affording borrowers the protections they deserve and are entitled to under the law. In addition, a model “Dear Colleague” letter attached to the memorandum illustrates how ED can implement these changes with the stroke of a pen.
Read the Memo: Campus Debit and Prepaid Cards and the Best Financial Interest Standard
Read the Letter: Dear Colleague letter
There is a long, unfortunate history of colleges and universities steering students toward predatory financial products. Across consumer financial markets—from student loans to credit cards—schools have been caught making back-room deals with lenders at borrowers’ expense.
The market for school-sponsored prepaid cards and debit cards clearly follows this example. Investigations and reports over the last two decades have revealed that card providers and schools tricked students into thinking signing up for cards was required for them to receive financial aid, inappropriately gained access to private student information, and charged borrowers “onerous, confusing, or unavoidable fees” to access their money.
As industry practices have evolved in response to the 2015 rulemaking, and as borrowers continue to be hit with massive and opaque fees, ED has chosen not to use the tools already at its disposal to rein in industry profiteering at students’ expense.
Of course, it is important to also note that neither fault nor borrower harm are solely attributable to the Department of Education. For the last several years, political pressure led the Consumer Financial Protection Bureau (CFPB) to halt data collection and public reporting efforts related to the abuses students face in the campus debit card market. For example, Donald Trump’s hand-picked appointees went so far as to shelve a report documenting how Wells Fargo was racking up millions of dollars in fee revenue at borrowers’ expense from campus cards. The Bureau must fulfill the promise it made in 2017 to increase transparency in the markets that affect students’ financial health.
In preparation for its next annual report on student banking and college credit card marketing agreements, the CFPB would be well served by a data collection effort specifically aimed at identifying and scoping the full breadth of risks that COVID has caused in the campus banking space, from a potential deluge of out-of-network fees for displaced students to overdrafts related to economic disruption and financial consequences for borrowers related to unexpected withdrawal from their course of study.
Nobody should face outrageous fees levied through shady agreements negotiated between their college and a financial institution. It’s time for the Biden Administration to use the tools already at its disposal to protect students.
Kate Sablosky Elengold is an Assistant Professor of Law and Director of the Consumer Financial Transactions (“CFT”) Clinic at University of North Carolina School of Law. Her scholarship bridges consumer and civil rights doctrines, with a specific focus on student debt, and under her direction, the CFT Clinic represents individuals and organizations fighting for consumer protections and legal rights.
Seth Frotman is the Executive Director of the Student Borrower Protection Center. He previously served as Assistant Director and Student Loan Ombudsman at the Consumer Financial Protection Bureau, where he led a government-wide effort to crack down on abuses by the student loan industry and protect borrowers.