Alert!Student Accounts Prepaid, Debits Cards, Accounts and Loans
Effective Date July 1, 2016
The material used in this text has been drawn from sources believed to be reliable. Every effort has been made to assure the accuracy of thematerial; however, the accuracy of this information is not guaranteed. The laws are often changed without prior notice from the government.The publisher and the editor are not engaging in the practice of law or accounting. We are not responsible for the actions of your company'semployees.
Instructor Deborah L Crawford • Debbie is the President of
Gettechnical Inc, a Virginia-based training company. Her combined banking and training experience began in 1984 and she is a deposit side expert. She received her Bachelors and Masters degrees from Louisiana State University.
• A) We use “prepaid card” to mean general-purpose reloadable cards.
• B) Credit Card Accountability Responsibility and Disclosure Act of 2009, Pub. L. No. 111-24, § 401, 123 Stat. 1734, 1751-1754.
• C) According to FDIC, funds placed on a prepaid card may or may not be covered by deposit insurance in the event of a bank failure, depending on how the account where the funds are held is set up and whether the bank or the card issuer’s records at the time of the bank closing identify each cardholder’s ownership interest. See www.fdic.gov/consumers/consumer/news/cnsum12/paymentcards.html.
• Study looked at college debit and prepaid agreements for cards receiving federal student aid program funds
• Study looked at – The functions of college cards and the
characteristics of schools and card providers
– Benefits concerning these cards
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• Federal Student Aid Programs as financial aid programs authorized under Title IV of the Higher Education Act of 1965 as amended. These programs include Pell Grant Program and the William D. Ford Federal Direct Loan Program
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• A debit card is issued by a bank and linked to a customer’s checking account. It allows the customer to withdraw cash from the account or to pay for goods and services. In a debit transaction, the amount of the transaction is withdrawn from the available balance in the cardholder’s account.
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• Prepaid cards appear and function much like a debit card, but are not linked to an individual consumer’s bank account. Instead, an amount is deposited into a pooled account, and withdrawals or purchases are made against the predeposited amount. Prepaid cards can be single-use or reloadable. Both banks and nonbank financial firms issue prepaid cards, but banks issue the majority of them, according to FDIC.
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The focus of the GAO study is on the use of college cards to pay financial aid to students. A school may make student payments in other situations, including when (1) other payments are credited to a student’s
account, such as veterans educational benefits, education savings plans, or payments by other parties; or
(2) a school’s charges are reduced due to changes in a student’s course load, housing, or meal plan, according to the National Association of College and University Business Officers.
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Education requires schools to pay any federal student aid funds that exceed the school’s charges directly to students as soon as possible, but no later than 14 days after the first day of classes or the date the funds were posted to the student’s account (whichever occurs later). Schools must pay these funds to students in cash or by check or electronic transfer to either a bank account, a checking account that can be accessed by a debit card, or a prepaid card.
Furthermore, schools that use debit and prepaid cards to pay federal student aid funds must follow additional requirements. Education’s requirements focus on ensuring that students have free access to federal student aid and are not forced to use a particular debit or prepaid card.And if schools contract with a bank or financial firm to manage the payment of federal aid to students, Education requires schools to ensure that the contractors comply with applicable regulations and provisions for federal aid. Education also encourages, but does not require, schools to annually disclose a breakdown of the average annual costs their students incur in using college cards, Education requires schools to pay any federal student aid funds that exceed the school’s charges directly to students as soon as possible, but no later than 14 days after the first day of classes or the date the funds were posted to the student’s account (whichever occurs later). Schools must pay these funds to students in cash or by check or electronic transfer to either a bank account, a checking account that can be accessed by a debit card, or a prepaid card.
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Why schools enter agreements with providers of cards…
• Cheaper using electronic funds transfer
• Lower administrative costs
• Improved student ID cards
• Revenue generation
• Reduced use of cash on campus
• Access to banking services
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Where GAO found problems
• Charges on PIN based transactions of .50
• Out of network fees
• Some require opening of account to get free ATM network fees
• Some schools making revenue from cards
• Marketing to students makes it appear that the card is the only option in some cases.
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Higher One
Release Date: July 1, 2014 For release at 9:30 a.m. EDT The Federal Reserve Board on Tuesday issued a consent order to cease and desist and a civil money penalty assessment of $3,510,000 against Cole Taylor Bank of Chicago, Illinois. The order addresses the participation by the bank and its agent, Higher One, Inc. of New Haven, Connecticut (Higher One), in deceptive practices in violation of section 5 of the Federal Trade Commission Act. Higher One is a nonbank entity that provides institutions of higher education with financial aid refund disbursement services for students. Higher One typically offers students three methods of receiving their financial aid refund: (1) paper check; (2) ACH transfer to an existing bank account; or (3) direct deposit to the Higher One deposit account and debit card product known as the "OneAccount." Because Higher One is not a bank, it must partner with banks to offer the OneAccount. From May 4, 2012 to August 14, 2013, Cole Taylor served as one of the banks providing deposit accounts in connection with the OneAccount
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The actions addressed in this order involve the following deceptive practices by Higher One, under Cole Taylor's oversight, that, at various points in the financial aid refund selection process, misled students about the OneAccount. • The omission of material information about how students could get
their financial aid refund without having to open a OneAccount; • The omission of material information about the fees, features, and
limitations of the OneAccount product, which may have made it more difficult for students to make fully informed decisions prior to selecting the method for financial aid refund disbursement;
• The omission of material information about the locations of ATMs where students could access their OneAccount without cost and the hours of availability of those ATMs; and
• The prominent display of the school logo, which may have erroneously implied that the school endorsed the OneAccount product.
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• Higher One is taking material corrective action to address these practices in its current disclosures to students. However, appropriate remedial actions against Higher One, including the payment of restitution for its past practices, are currently being pursued. In addition to the civil money penalty, the order against Cole Taylor Bank also requires it to assume backup liability for any restitution to students that Higher One is required to pay in a Federal Reserve enforcement action in the event that Higher One cannot pay the restitution amounts. Actions are also being pursued against another state member bank that has a similar arrangement with Higher One relating to the OneAccounts.
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• Disclosure is required for agreements for another college-related financial product—affinity credit cards—and for student loans and lenders. Affinity credit cards typically bear the name or logo of the school or organization and, in return, the card provider pays a portion of the proceeds of the credit card back to the organization. The Credit CARD Act, together with implementing regulations, establishes requirements for disclosure to federal authorities of the contracts between these card providers and school-related entities, plus other key information, such as payments from providers. Under the act, the Federal Reserve (initially) and CFPB (most recently) have produced reports that summarize the disclosure
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What GAO Recommended
What GAO RecommendsCongress should consider requiring that financial firms providing debit and prepaid card services to colleges file their agreements for public review and provide other relevant information. The Department of Education should (1) specify what constitutes convenient access to ATMs
or bank branch offices for students receiving federal student aid funds and
(2) develop requirements for schools and card providers to present neutral information to students about their options for receiving federal student aid funds.
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The Problem Resolved? More regulations.
News Release from Department of Education on Final Rules
Part I
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• U.S. Department of Education Announces Two Final Regulations to Protect Students and Help Borrowers
• Final regulations will protect students from unreasonable fees, safeguard taxpayer dollars and expand income-based repayment plan to millions of Americans
• OCTOBER 27, 2015• Contact: Press Office, (202) 401-
Recent changes in the higher education marketplace have led to the proliferation of campus debit and prepaid cards offered to students in exchange for monetary benefits to schools. According to the Government Accountability Office (GAO) and the U.S. Public Interest Research Group (USPIRG), institutions enrolling approximately nine million students—about 40 percent of all college students—have debit or prepaid card agreements. The Department estimates that nearly $25 billion dollars in Pell Grant and Direct Loan program funds are annually released to students at institutions using these accounts. The Department proposed the Cash Management regulation in May.
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• Under the final regulations, students will be able to freely choose how to receive their Federal student aid refunds, student will be given objective and neutral information about their financial aid disbursement options, and they will no longer be forced to pay excessive fees to access their Federal student aid, including Pell Grants.
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They will also:
• Require institutions (schools)to give students greater choice about how to receive their student aid.
• Prohibit institutions from requiring students or parents to open a certain account into which their student aid refunds are deposited.
• Require institutions (schools) to ensure that students are not charged excessive and confusing fees (e.g., overdraft fees and transaction-swipe fees) if a student selects an account offered directly or indirectly by contractors that assist institutions (schools) in making direct payments of Federal student aid.
• Require an institution to provide students with a list of account options that the student may choose from to receive their student aid refunds, where each option is presented in a neutral manner and makes clear that the student can have their student aid deposited to their preexisting bank account.
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• Require institutions (schools) to ensure that electronic payments made to a student's preexisting account are made as timely as, and no more onerous to the student than, payments made to accounts marketed through the institution.
• Allow institutions (schools) to share limited student information with third-party servicers that offer financial products to allow the continued functioning of disbursement processes, while also protecting private student information, such as Social Security numbers or portions thereof.
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• The goal of these regulations is to protect students by (1) ensuring that students have fee-free access to funds needed to pay for education expenses such as food and housing and books and supplies, (2) improve contractual transparency between educational institutions (schools) and private financial partners, and (3) eliminate or reduce many of the troubling practices identified by consumer advocates, the GAO, and in a Department's Inspector General's report calling for student choice and transparency.
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• The report identified several troubling practices in the campus card market, including biased and incomplete information provided to students, evidence that third-party servicers use their access to student information to persuade students to select a preferred account over other options, and evidence that some students are incurring unreasonably high fees by using these accounts and are losing their federal student aid funds as a result.
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Breaking Down the RegulationPart 1 – Protecting Students & Federal Student Aid
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Debbie
Note: When reading this regulation the word “institution” is referring to the college.
Eligible Program
Full-time student: An enrolled student who is carrying a full-time academic workload, as determined by the institution, under a standard applicable to all students enrolled in a particular educational program. The student’s workload may include any combination of courses, work, research, or special studies that the institution considers sufficient to classify the student as a full-time student
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Subpart K—Cash ManagementSec.668.161 Scope and institutional responsibility.668.162 Requesting funds.668.163 Maintaining and accounting for funds.668.164 Disbursing funds.668.165 Notices and authorizations.668.166 Excess cash.668.167 Severability.
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§668.161 Scope and institutional responsibility.
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(a) General. (1) This subpart establishes the rules under which a participating institution requests, maintains, disburses, and otherwise manages title IV, HEA program funds.(2) As used in this subpart—(i) Access device means a card, code, or other means of access to a financial account, or any combination thereof, that may be used by a student to initiate electronic fund transfers;(ii) Day means a calendar day, unless otherwise specified;
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(iii) Depository account means an account at a depository institution described in 12 U.S.C. 461(b)(1)(A), or an account maintained by a foreign institution at a comparable depository institution that meets the requirements of §668.163(a)(1);(iv)EFT (Electronic Funds Transfer)means a transaction initiated electronically instructing the crediting or debiting of a financial account, or an institution’s depository account. For purposes of transactions initiated by the Secretary, the term ‘‘EFT’’ includes all transactions covered by 31 CFR 208.2(f). For purposes of transactions initiated by or on behalf of an institution, the term ‘‘EFT’’ includes, from among the transactions covered by 31 CFR 208.2(f), only Automated Clearinghouse transactions;(v) Financial account means a student’s or parent’s checking or savings account, prepaid card account, or other consumer asset account held directly or indirectly by a financial institution;
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(vi) Financial institution means a bank, savings association, credit union,or any other person or entity that directly or indirectly holds a financial account belonging to a student, issues to a student an access device associated with a financial account, and agrees with the student to provide EFT services;(vii) Parent means the parent borrower of a Direct PLUS Loan;(viii) Student ledger account means a bookkeeping account maintained by an institution to record the financial transactions pertaining to a student’s enrollment at the institution; and(ix) Title IV, HEA programs means the Federal Pell Grant, Iraq-Afghanistan Service Grant, TEACH Grant, FSEOG, Federal Perkins Loan, FWS, and Direct Loan programs, and any other program designated by the Secretary.
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(b)Federal interest in title IV, HEA program funds. Except for funds provided by the Secretary for administrative expenses, and for funds used for the Job Location and Development Program under 20 CFR part 675, subpart B, funds received by an institution under the title IV, HEA programs are held in trust for the intended beneficiaries or the Secretary. The institution, as a trustee of those funds, may not use or hypothecate (i.e., use as collateral) the funds for any other purpose or otherwise engage in any practice that risks the loss of those funds.(c) Standard of conduct. An institution must exercise the level of care and diligence required of a fiduciary with regard to managing title IV, HEA program funds under this subpart.
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668.162 Requesting funds.
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(a) General. The Secretary has sole discretion to determine the method under which the Secretary provides title IV, HEA program funds to an institution. In accordance with procedures established by the Secretary, the Secretary may provide funds to an institution under the advance payment method, reimbursement payment method, or heightened cash monitoring payment method.
(b) Advance payment method. (1) Under the advance payment method, an institution submits a request for funds to the Secretary. The institution’s request may not exceed the amount of funds the institution needs immediately for disbursements the institution has made or will make to eligible students and parents.(2) If the Secretary accepts that request, the Secretary initiates an EFT of that amount to the depository account designated by the institution.(3) The institution must disburse the funds requested as soon as administratively feasible but no later than three business days following the date the institution received those funds.
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(c) Reimbursement payment method.(1) Under the reimbursement payment method, an institution must credit a student’s ledger account for the amount of title IV, HEA program funds that the student or parent is eligible to receive, and pay the amount of any credit balance due under § 668.164(h), before the institution seeks reimbursement from the Secretary for those disbursements.(2) An institution seeks reimbursement by submitting to the Secretary a request for funds that does not exceed the amount of the disbursements the institution has made to students or parents included in that request.(3) As part of its reimbursement request, the institution must—(i) Identify the students or parents for whom reimbursement is sought; and(ii) Submit to the Secretary, or an entity approved by the Secretary, documentation that shows that each student or parent included in the request was—(A) Eligible to receive and has received the title IV, HEA program funds for which reimbursement is sought; and(B) Paid directly any credit balance due under § 668.164(h).
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(4) The Secretary will not approve the amount of the institution’s reimbursement request for a student or parent and will not initiate an EFT of that amount to the depository account designated by the institution, if the Secretary determines with regard to that student or parent, and in the judgment of the Secretary, that the institution has not—
(i) Accurately determined the student’s or parent’s eligibility for title IV, HEA program funds;
(ii) Accurately determined the amount of title IV, HEA program funds disbursed, including the amount paid directly to the student or parent; and
(iii) Submitted the documentation required under paragraph (c)(3) of this section.
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(d) Heightened cash monitoring payment method. Under the heightened cash monitoring payment method, an institution must credit a student’s ledger account for the amount of title IV, HEA program funds that the student or parent is eligible to receive, and pay the amount of any credit balance due under § 668.164(h), before the institution—(1) Submits a request for funds under the provisions of the advance payment method described in paragraphs (b)(1) and (2) of this section, except that the institution’s request may not exceed the amount of the disbursements the institution has made to the students included in that request; or(2) Seeks reimbursement for those disbursements under the provisions of the reimbursement payment method described in paragraph (c) of this section, except that the Secretary may modify the documentation requirements and review procedures used to approve the reimbursement request.
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668.163 Maintaining and accounting for funds
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When you are the educational institution’s bank…
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(a)(1) Institutional depository account. An institution must maintain title IV, HEA program funds in a depository account. For an institution located in a State, the depository account must be insured by the FDIC or NCUA. For a foreign institution, the depository account may be insured by the FDIC or NCUA, or by an equivalent agency of the government of the country in which the institution is located. If there is no equivalent agency, the Secretary may approve a depository account designated by the foreign institution.(2) For each depository account that includes title IV, HEA program funds, an institution located in a State must clearly identify that title IV, HEA program funds are maintained in that account by—(i) Including in the name of each depository account the phrase ‘‘Federal Funds’’; or(ii)(A) Notifying the depository institution that the depository account contains title IV, HEA program funds that are held in trust and retaining a record of that notice; and(B) Except for a public institution located in a State or a foreign institution, filing with the appropriate State or municipal government entity a UCC–1 statement disclosing that the depository account contains Federal funds and maintaining a copy of that statement.
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(b) Separate depository account. The Secretary may require an institution to maintain title IV, HEA program funds in a separate depository account that contains no other funds if the Secretary determines that the institution failed to comply with—(1) The requirements in this subpart;(2) The recordkeeping and reporting requirements in subpart B of this part; or(3) Applicable program regulations.
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(c) Interest-bearing depository account. (1) An institution located in a State is required to maintain its title IV, HEA program funds in an interest- bearing depository account, except as provided in 2 CFR 200.305(b)(8).(2) Any interest earned on Federal Perkins Loan program funds is retained by the institution as provided under 34 CFR 674.8(a).(3) An institution may keep the initial $500 in interest it earns during the award year on other title IV, HEA program funds it maintains in accordance with paragraph (c)(1) of this section. No later than 30 days after the end of that award year, the institution must remit to the Department of Health and Human Services, Payment Management System, Rockville, MD 20852, any interest over $500.
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(d) Accounting and fiscal records. An institution must—
(1) Maintain accounting and internal control systems that identify
the cash balance of the funds of each title IV, HEA program that
are included in the institution’s depository account or accounts
as readily as if those funds were maintained in a separate
depository account;
(2) Identify the earnings on title IV, HEA program funds
maintained in the institution’s depository account or accounts;
and
(3) Maintain its fiscal records in accordance with the provisions
in § 668.24.
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668.164 Disbursing funds.
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(a) Disbursement. (1) Except as provided under paragraph (a)(2) of this section, a disbursement of title IV, HEA program funds occurs on the date that the institution credits the student’s ledger account or pays the student or parent directly with—(i) Funds received from the Secretary; or(ii) Institutional funds used in advance of receiving title IV, HEA program funds.(2)(i) For a Direct Loan for which the student is subject to the delayed disbursement requirements under 34 CFR 685.303(b)(5), if an institution credits a student’s ledger account with institutional funds earlier than 30 days after the beginning of a payment period, the Secretary considers that the institution makes that disbursement on the 30th day after the beginning of the payment period; or(ii) If an institution credits a student’s ledger account with institutional funds earlier than 10 days before the first day of classes of a payment period, the Secretary considers that the institution makes that disbursement on the 10th day before the first day of classes of a payment period.
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(b) Disbursements by payment period.
(1) Except for paying a student under the FWS program or
unless 34 CFR 685.303(d)(4)(i) applies, an institution must
disburse during the current payment period the amount of title IV,
HEA program funds that a student enrolled at the institution, or
the student’s parent, is eligible to receive for that payment
period.
(2) An institution may make a prior year, late, or retroactive
disbursement, as provided under paragraph (c)(3), (j), or (k) of
this section, respectively, during the current payment period as
long as the student was enrolled and eligible during the payment
period covered by that prior year, late, or retroactive
disbursement.
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(c) Crediting a student’s ledger account. (1) An institution may credit a
student’s ledger account with title IV, HEA program funds to pay for
allowable charges associated with the current payment period.
Allowable charges are—
(i) The amount of tuition, fees, and institutionally provided room and
board assessed the student for the payment period or, as provided in
paragraph (c)(5) of this section, the prorated amount of those charges if
the institution debits the student’s ledger account for more than the
charges associated with the payment period; and
(ii) The amount incurred by the student for the payment period for
purchasing books, supplies, and other educationally related goods and
services provided by the institution for which the institution obtains the
student’s or parent’s authorization under § 668.165(b).
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(2) An institution may include the costs of books and supplies as part of tuition and fees under paragraph (c)(1)(i) of this section if —(i) The institution—(A) Has an arrangement with a book publisher or other entity that enables it to make those books or supplies available to students below competitive market rates;(B) Provides a way for a student to obtain those books and supplies by the seventh day of a payment period; and(C) Has a policy under which the student may opt out of the way the institution provides for the student to obtain books and supplies under this paragraph (c)(2). A student who opts out under this paragraph (c)(2) is considered to also opt out under paragraph (m)(3) of this section;(ii) The institution documents on a current basis that the books or supplies, including digital or electronic course materials, are not available elsewhere or accessible by students enrolled in that program from sources other than those provided or authorized by the institution; or(iii) The institution demonstrates there is a compelling health or safety reason.
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(3)(i) An institution may include in one or more payment periods for the current year, prior year charges of not more than $200 for—(A) Tuition, fees, and institutionally provided room and board, as provided under paragraph (c)(1)(i) of this section, without obtaining the student’s or parent’s authorization; and(B) Educationally related goods and services provided by the institution, as described in paragraph (c)(1)(ii) of this section, if the institution obtains the student’s or parent’s authorization under § 668.165(b).(ii) For purposes of this section—(A) The current year is—(1) The current loan period for a student or parent who receives only a Direct Loan;(2) The current award year for a student who does not receive a Direct Loan but receives funds under any other title IV, HEA program; or(3) At the discretion of the institution, either the current loan period or the current award year if a student receives a Direct Loan and funds from any other title IV, HEA program.
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(B) A prior year is any loan period or award year prior to the current loan period or award year, as applicable.(4) An institution may include in the current payment period unpaid allowable charges from any previous payment period in the current award year or current loan period for which the student was eligible for title IV, HEA program funds.(5) For purposes of this section, an institution determines the prorated amount of charges associated with the current payment period by—(i) For a program with substantially equal payment periods, dividing the total institutional charges for the program by the number of payment periods in the program; or(ii) For other programs, dividing the number of credit or clock hours in the current payment period by the total number of credit or clock hours in the program, and multiplying that result by the total institutional charges for the program.
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(d) Direct payments. (1) Except as provided under paragraph (d)(3) of this section, an institution makes a direct payment—(i) To a student, for the amount of the title IV, HEA program funds that a student is eligible to receive, including Direct PLUS Loan funds that the student’s parent authorized the student to receive, by—(A) Initiating an EFT of that amount to the student’s financial account;(B) Issuing a check for that amount payable to, and requiring the endorsement of, the student; or(C) Dispensing cash for which the institution obtains a receipt signed by the student;(ii) To a parent, for the amount of the Direct PLUS Loan funds that a parent does not authorize the student to receive, by—(A) Initiating an EFT of that amount to the parent’s financial account;(B) Issuing a check for that amount payable to and requiring the endorsement of the parent; or(C) Dispensing cash for which the institution obtains a receipt signed by the parent.
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(2) Issuing a check. An institution issues a check on the date that it—(i) Mails the check to the student or parent; or(ii) Notifies the student or parent that the check is available for immediate pick-up at a specified location at the institution. The institution may hold the check for no longer than 21 days after the date it notifies the student or parent. If the student or parent does not pick up the check, the institution must immediately mail the check to the student or parent, pay the student or parent directly by other means, or return the funds to the appropriate title IV, HEA program.(3) Payments by the Secretary. The Secretary may pay title IV, HEA credit balances under paragraphs (h) and (m) of this section directly to a student or parent using a method established or authorized by the Secretary and published in the Federal Register.
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(4) Student choice. (i) An institution located in a State that makes direct payments to a student by EFT and that enters into an arrangement described in paragraph (e) or (f) of this section, including an institution that uses a third-party servicer to make those payments, must establish a selection process under which the student chooses one of several options for receiving those payments.(A) In implementing its selection process, the institution must—(1) Inform the student in writing that he or she is not required to open or obtain a financial account or access device offered by or through a specific financial institution;(2) Ensure that the student’s options for receiving direct payments are described and presented in a clear, fact- based, and neutral manner;(3) Ensure that initiating direct payments by EFT to a student’s existing financial account is as timely and no more onerous to the student as initiating an EFT to an account provided under an arrangement described in paragraph (e) or (f) of this section;
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(4) Allow the student to change, at any time, his or her previously selected payment option, as long as the student provides the institution with written notice of the change within a reasonable time;(5) Ensure that no account option is preselected; and(6) Ensure that a student who does not make an affirmative selection is paid the full amount of the credit balance within the appropriate time-period specified in paragraph (h)(2) of this section, using a method specified in paragraph (d)(1) of this section.(B) In describing the options under its selection process, the institution—(1) Must present prominently as the first option, the financial account belonging to the student;
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(2) Must list and identify the major features and commonly assessed fees associated with each financial account offered under the arrangements described in paragraphs (e) and (f) of this section, as well as a URL for the terms and conditions of each account. For each account, if an institution by July 1, 2017 follows the format, content, and update requirements specified by the Secretary in a notice published in the Federal Register following consultation with the Bureau of Consumer Financial Protection, it will be in compliance with the requirements of this paragraph with respect to the major features and assessed fees associated with the account; and(3) May provide, for the benefit of the student, information about available financial accounts other than those described in paragraphs (e) and (f) of this section that have deposit insurance under 12 CFR part 330, or share insurance in accordance with 12 CFR part 745.(ii) An institution that does not offeror use any financial accounts offered under paragraph (e) or (f) of this section may make direct payments to a student’s or parent’s existing financial account, or issue a check or disburse cash to the student or parent without establishing the selection process described in paragraph (d)(4)(i) of this section.
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When your financial institution is operating through a third party
to provide services…Tier One
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(e) Tier one arrangement. (1) In a Tier one (T1) arrangement—(i) An institution located in a State has a contract with a third-party servicer under which the servicer performs one or more of the functions associated with processing direct payments of title IV, HEA program funds on behalf of the institution; and(ii) The institution or third-party servicer makes payments to—(A) One or more financial accounts that are offered to students under the contract;(B) A financial account where information about the account is communicated directly to students by the third-party servicer, or the institution on behalf of or in conjunction with the third-party servicer; or(C) A financial account where information about the account is communicated directly to students by an entity contracting with or affiliated with the third-party servicer.
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(2) Under a T1 arrangement, the institution must—(i) Ensure that the student’s consent to open the financial account is obtained before an access device, or any representation of an access device, is sent to the student, except that an institution may send the student an access device that is a card provided to the student for institutional purposes, such as a student ID card, so long as the institution or financial institution obtains the student’s consent before validating the device to enable the student to access the financial account;(ii) Ensure that any personally identifiable information about a student that is shared with the third-party servicer before the student makes a selection under paragraph (d)(4)(i) of this section—
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(A) Does not include information about the student, other than directory information under 34 CFR 99.3 that is disclosed pursuant to 34 CFR 99.31(a)(11) and 99.37, beyond—(1) A unique student identifier generated by the institution that does not include a Social Security number, in whole or in part;(2) The disbursement amount;(3) A password, PIN code, or other shared secret provided by the institution that is used to identify the student; or(4) Any additional items specified by the Secretary in a notice published in the Federal Register;(B) Is used solely for activities that support making direct payments of title IV, HEA program funds and not for any other purpose; and(C) Is not shared with any other affiliate or entity except for the purpose described in paragraph (e)(2)(ii)(B) of this section;
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(iii) Inform the student of the terms and conditions of the financial account, as required under paragraph (d)(4)(i)(B)(2) of this section, before the financial account is opened;(iv)Ensure that the student—(A) Has convenient access to the funds in the financial account through a surcharge-free national or regional Automated Teller Machine (ATM) network that has ATMs sufficient in number and housed and serviced such that title IV funds are reasonably available to students, including at the times the institution or its third-party servicer makes direct payments into the financial accounts of those students;
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(B) Does not incur any cost—(1) For opening the financial account or initially receiving an access device;(2) Assessed by the institution, third- party servicer, or a financial institution associated with the third-party servicer, when the student conducts point-of-sale transactions in a State; and(3) For conducting a balance inquiry or withdrawal of funds at an ATM in a State that belongs to the surcharge-free regional or national network;
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(v) Ensure that—(A) The financial account or access device is not marketed or portrayed as, or converted into, a credit card;(B) No credit is extended or associated with the financial account, and no fee is charged to the student for any transaction or withdrawal that exceeds the balance in the financial account or on the access device, except that a transaction or withdrawal that exceeds the balance may be permitted only for an inadvertently authorized overdraft, so long as no fee is charged to the student for such inadvertently authorized overdraft; and (C) The institution, third-party servicer, or third-party servicer’s associated financial institution provides a student accountholder convenient access to title IV, HEA program funds in part and in full up to the account balance via domestic withdrawals and transfers without charge, during the student’s entire period of enrollment following the date that such title IV, HEA program funds are deposited or transferred to the financial account;
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(vi) No later than September 1, 2016, and then no later than 60 days following the most recently completed award year thereafter, disclose conspicuously on the institution’s Web site the contract(s) establishing the T1 arrangement between the institution and third-party servicer or financial institution acting on behalf of the third-party servicer, as applicable, except for any portions that, if disclosed, would compromise personal privacy, proprietary information technology, or the security of information technology or of physical facilities;
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(vii) No later than September 1, 2017, and then no later than 60 days following the most recently completed award year thereafter, disclose conspicuously on the institution’s Web site and in a format established by the Secretary—(A) The total consideration for the most recently completed award year, monetary and non-monetary, paid or received by the parties under the terms of the contract; and(B) For any year in which the institution’s enrolled students open 30 or more financial accounts under the T1 arrangement, the number of students who had financial accounts under the contract at any time during the most recently completed award year, and the mean and median of the actual costs incurred by those account holders;
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(viii) Provide to the Secretary an up- to-date URL for the contract for publication in a centralized database accessible to the public;(ix) Ensure that the terms of the accounts offered pursuant to a T1 arrangement are not inconsistent with the best financial interests of the students opening them. The Secretary considers this requirement to be met if—(A) The institution documents that it conducts reasonable due diligence reviews at least every two years to ascertain whether the fees imposed under the T1 arrangement are, considered as a whole, consistent with or below prevailing market rates; and(B) All contracts for the marketing or offering of accounts pursuant to T1 arrangements to the institution’s students make provision for termination of the arrangement by the institution based on complaints received from students or a determination by the institution under paragraph (e)(2)(ix)(A) of this section that the fees assessed under the T1 arrangement are not consistent with or are higher than prevailing market rates; and
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(x) Take affirmative steps, by way of contractual arrangements with the third- party servicer as necessary, to ensure that requirements of this section are met with respect to all accounts offered pursuant to T1 arrangements.(3) Except for paragraphs (e)(2)(ii)(B) and (C) of this section, the requirements of paragraph (e)(2) of this section no longer apply to a student who has an account described under paragraph (e)(1) of this section when the student is no longer enrolled at the institution and there are no pending title IV disbursements for that student, except that nothing in this paragraph (e)(3) should be construed to limit the institution’s responsibility to comply with paragraph (e)(2)(vii) of this section with respect to students enrolled during the award year for which the institution is reporting. To effectuate this provision, an institution may share information related to title IV recipients’ enrollment status with the servicer or entity that is party to the arrangement.
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When your financial institution markets directly through
school….
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(f) Tier two arrangement. (1) In a Tier two (T2) arrangement, an institution located in a State has a contract with a financial institution, or entity that offers financial accounts through a financial institution, under which financial accounts are offered and marketed directly to students enrolled at the institution.(2) Under a T2 arrangement, an institution must—(i) Comply with the requirements described in paragraphs (d)(4)(i), (f)(4)(i) through (iii), (vii), and (ix) through (xi), and (f)(5) of this section if it has at least one student with a title IV credit balance in each of the three most recently completed award years, but has less than the number and percentage of students with credit balances as described in paragraphs (f)(2)(ii)(A) and(B) of this section; and
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(ii) Comply with the requirements specified in paragraphs (d)(4)(i), (f)(4), and (f)(5) of this section if, for the three most recently completed award years—(A) An average of 500 or more of its students had a title IV credit balance; or(B) An average of five percent or more of the students enrolled at the institution had a title IV credit balance. The institution calculates this percentage as follows:
The average number of students with credit balances for the three most recently completed award years
The average number of students enrolled at the institution at any time during the three most recently completed award years.
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(3) The Secretary considers that a financial account is marketed directly if—(i) The institution communicatesinformation directly to its students about the financial account and how it may be opened;(ii) The financial account or accessdevice is cobranded with the institution’s name, logo, mascot, or other affiliation and is marketed principally to students at the institution; or(iii) A card or tool that is provided tothe student for institutional purposes, such as a student ID card, is validated, enabling the student to use the device to access a financial account.
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(4) Under a T2 arrangement, the institution must—(i) Ensure that the student’s consent to open the financial account has been obtained before—(A) The institution provides, or permits a third-party servicer to provide, any personally identifiable about the student to the financial institution or its agents, other than directory information under 34 CFR 99.3 that is disclosed pursuant to 34 CFR 99.31(a)(11) and 99.37;(B) An access device, or any representation of an access device, is sent to the student, except that an institution may send the student an access device that is a card provided to the student for institutional purposes, such as a student ID card, so long as the institution or financial institution obtains the student’s consent before validating the device to enable the student to access the financial account;
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(ii) Inform the student of the terms and conditions of the financial account as required under paragraph (d)(4)(i)(B)(2) of this section, before the financial account is opened;(iii) No later than September 1, 2016, and then no later than 60 days following the most recently completed award year thereafter—(A) Disclose conspicuously on the institution’s Web site the contract(s) establishing the T2 arrangement between the institution and financial institution in its entirety, except for any portions that, if disclosed, would compromise personal privacy, proprietary information technology, or the security of information technology or of physical facilities; and(B) Provide to the Secretary an up-to- date URL for the contract for publication in a centralized database accessible to the public;
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(iv) No later than September 1, 2017, and then no later than 60 days following the most recently completed award year thereafter, disclose conspicuously on the institution’s Web site and in a format established by the Secretary—(A) The total consideration for the most recently completed award year, monetary and non-monetary, paid or received by the parties under the terms of the contract; and(B) For any year in which the institution’s enrolled students open 30 or more financial accounts marketed under the T2 arrangement, the number of students who had financial accounts under the contract at any time during the most recently completed award year, and the mean and median of the actual costs incurred by those account holders;
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(v) Ensure that the items under paragraph (f)(4)(iv) of this section are posted at the URL that is sent to the Secretary under paragraph (f)(4)(iii)(B) of this section for publication in a centralized database accessible to the public;(vi) If the institution is located in a State, ensure that the student accountholder can execute balance inquiries and access funds deposited in the financial accounts through surcharge-free in-network ATMs sufficient in number and housed and serviced such that the funds are reasonably available to the accountholder, including at the times the institution or its third-party servicer makes direct payments into them;
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(vii) Ensure that the financial accounts are not marketed or portrayed as, or converted into, credit cards;(viii) Ensure that the terms of the accounts offered pursuant to a T2 arrangement are not inconsistent with the best financial interests of the students opening them. The Secretary considers this requirement to be met if—(A) The institution documents that it conducts reasonable due diligence reviews at least every two years to ascertain whether the fees imposed under the T2 arrangement are, considered as a whole, consistent with or below prevailing market rates; and(B) All contracts for the marketing or offering of accounts pursuant to T2 arrangements to the institution’s students make provision for termination of the arrangement by the institution based on complaints received from students or a determination by the institution under paragraph (f)(4)(viii)(A) of this section that the fees assessed under the T2 arrangement are not consistent with or are above prevailing market rates;
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(ix) Take affirmative steps, by way of contractual arrangements with the financial institution as necessary, to ensure that requirements of this section are met with respect to all accounts offered pursuant to T2 arrangements; and(x) Ensure students incur no cost for opening the account or initially receiving or validating an access device.
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(xi) If the institution enters into an agreement for the cobranding of a financial account with the institution’s name, logo, mascot, or other affiliation but maintains that the account is not marketed principally to its enrolled students and is not otherwise marketed directly within the meaning of paragraph (f)(3) of this section, the institution must retain the cobranding contract and other documentation it believes establishes that the account is not marketed directly to its enrolled students, including documentation that the cobranded financial account or access device is offered generally to the public.(xii) Institutions falling below the thresholds described in paragraph (f)(2) of this section are encouraged to comply voluntarily with the provisions of paragraphs (d)(4)(i), (f)(4), and (f)(5) of this section.
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(5) The requirements of paragraph (f)(4) of this section no longer apply with respect to a student who has an account described under paragraph (f)(1) of this section when the student is no longer enrolled at the institution and there are no pending title IV disbursements, except that nothing in this paragraph should be construed to limit the institution’s responsibility to comply with paragraph (f)(4)(iv) of this section with respect to students enrolled during the award year for which the institution is reporting. To effectuate this provision, an institution may share information related to title IV recipients’ enrollment status with the financial institution or entity that is party to the arrangement.
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(g) Ownership of financial accounts opened through outreach to an institution’s students. Any financial account offered or marketed pursuant to an arrangement described in paragraph(e) or (f) of this section must meet the requirements of 31 CFR 210.5(a) or (b)(5), as applicable.(h) Title IV, HEA credit balances. (1) A title IV, HEA credit balance occurs whenever the amount of title IV, HEA program funds credited to a student’s ledger account for a payment period exceeds the amount assessed the student for allowable charges associated with that payment period as provided under paragraph (c) of this section.
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Summary of T1 and T2 Requirements
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Defines T1 and T2 arrangements between institutions and financial account providers
§668.164
TIArrangement between an institution and a third‐party servicer that performs the functions of processing direct payments of title IV funds on behalf of the institution and that offers one or more financial accounts to students
T2Arrangement between an institution and a financial institution under which financial accounts are offered and marketed directly to students. Provisions related to disclosure of contract data, ATM requirements, and the best interest provisions apply only to those institutions with at least 5 percent of the average enrollment for the 3 most recently completed award years or an average of 500 students with a credit balance for the 3 most recently completed award years. For the calculation of the 5 percent threshold, enrollment means students enrolled at the institution at any time during the three most recently completed award years.
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Fee mitigation §668.164 T1
Prohibits point‐of‐sale
and overdraft fees
Requires at least 1
convenient
mechanism for
students to access
title IV, HEA funds in
full and in part
without charge
T2
Not Applicable
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T 1 and T2
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Reasonable access to funds §668.164 Requires reasonable access to fee‐free ATMs or a surcharge‐free ATM network. Applies only to institutions located in a State. For T2 arrangements, the threshold of 5 percent of the average enrollment over the most recent 3 award years or an average of 500 credit balance recipients for the 3 most recent award years applies.
T1 and T2
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Student choice process §668.164 Requires institutions to establish a student choice process that:
Prohibits institutions from requiring students to open
a specific financial account to receive credit balances
Provides students a list of options for receiving credit
balance funds with each option presented in a neutral
manner
Lists pre‐existing accounts as the first, and most
prominent, option, with no option preselected
Establishes that aid recipients have the right to receive
funds to existing accounts
Ensures that electronic payments made to pre‐existing
accounts are initiated as timely as and are no more
onerous than payments made to an account on the list
of options
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T1 and T2
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Consent to open account §668.164 Student choice of the account or consent required to open account before:
Providing information about student to financial account provider
Sending access device to student
Associating student ID with a financial account
When you just have federal money going into accounts…
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Implications
• Full disclosure of fees for students
• Watch overdraft programs
• Per day charges on overdrafts
• Marketing is clear and accurate
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Best practices
• You can charge monthly maintenance fees• Eliminate .50 exchange fees• Do not charge students for withdrawals
from ATMs and disclose where the ATMS are that are free
• Consider eliminating overdraft fees and per day charges for students
• Careful what information you are providing about students
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Life Cycle
Open Student Account
Determine type of
institution
See what regulations may apply
Determine Consumer Risk/UDAAP
Change account to
adult
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Law/regulation Debit cards Prepaid Cards
Electronic Fund Transfer
Act 15 U.S.C. §§ 1693‐
1693r
Regulation E
12 C.F.R. Part 1005
Cardholder liability limited to $50 ifcardholder notifies issuing financialinstitution within 2 business days afterdiscovering the loss or theft of an access device. Notification after 2business days may result in loss of up to $500 (or more, in certaincircumstances).
Financial institutions must disclose feesassociated with debit card andmustissue statement for eachmonthly cyclein which a transaction occurred and atleast quarterly if no transactionoccurred.
Financial institutions must provide 21‐day notice before altering fee scheduleor liability limits for unauthorizedtransactions.
Cardholders must provide their financialinstitutions with written permission toallow institution to charge overdraft feefor one‐ time debit card or ATM transaction use while balance is negative (“opt in”).
Regulation E generally does not apply, but Bureau of ConsumerFinancial Protection (CFPB) has issued an advance notice ofproposed rulemaking as it considerswhether to extend the regulation’sprotections to prepaid cards.
Cardholder liability not limitedunder federal law, althoughliability may be limited bycontract.
No disclosure or periodicstatement requirements under federal law.
No requirement that card issuersprovide notice of fee changes. Prepaid cards also may have morefee types than debit cards.
Generally, cardholder cannot spend more than card’s loaded value.
Credit CARD Act restrictions ondormancy fees, service fees, or expiration dates apply only to giftcards, not to cards used moregenerally as replacements forchecking or deposit accounts.
Generally, institutions ofpostsecondary educationmust havewritten permission from students torelease personally identifiableinformation from student’seducation record. However, FERPAallows disclosure of student recordswithout prior consent to “schoolofficials”who can be outside partiescontracted by the schools, such asdebit card providers with alegitimate educational interest, andto appropriate parties in connectionwith financial aid.
Schools may disclose withoutconsent “directory information,” such as a student’s name, address, and date of birth.
Outside parties receiving studentinformationmust give theinformation the same protection as schools and can use it only for intended purpose.
FERPA does not apply untilstudent begins attending theschool.
Loading of card with personallyidentifiable information beforestudent consents to the relationshipis a violation of FERPA.
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Federal deposit insurance Underlying checking or deposit accounts towhich debit cards are tied carry up to$250,000 in mandatory Federal Deposit Insurance Corporation (FDIC) insurance.
Funds linked to prepaid card may or maynot be insured. Cardholders may not becovered by deposit insurance if FDIC requirements for “pass‐through” insurance not met.cCard issuers may choose whether tocover the product with FDIC insurance.Others may opt for coverage throughstate money transmitter licenses, which require a surety bond.
Expedited Funds
Availability Act 12 U.S.C. §§
4001‐4010
Regulation CC 12
CFR Part 229
Electronic payments must be madeavailable on first business day followingbanking day of deposit (“next‐dayavailability”). Transaction accountholdersmust receive disclosures on when fundswill be available.
Generally, prepaid cards not subject toRegulation CC, but the provision could apply, depending on card features.
Regulation II (debit cardinterchange fees androuting)
12 C.F.R. Part 235
Debit cards are subject to regulatorystandards for assessing whetherinterchange fees received by debit cardissuer for electronic debit transaction arereasonable and proportional to the costsincurred by issuer for the transaction.Interchange fee standards do not apply tointerchange fees charged or received bydebit card issuer that has total assets ofless than $10 billion (with affiliates) andholds the account being debited.
Certain prepaid cards are exempt frominterchange fee limitations. If prepaidcard is onlymeans of accessing underlying funds (except when all remaining funds are provided tocardholder in single transaction),interchange fee standards do not apply.
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Law/regulation Debit cards and Prepaid cards
Higher Education Act of 1965, as amended, Title IV20 U.S.C. §§ 1070‐1099d and42U.S.C. §§ 2751‐2756b34 C.F.R. § 668.164
Regulations implementing Title IV permit payment offunds to student or parent bank account, defined as anaccount insured by FDIC or the National Credit Union ShareInsurance Fund. The account may be one that “underlies a stored‐value card or other transaction device.”
When a school opens a bank account on behalf of a student or assists a student in opening a bank account, the school must, among other things: obtain written consent from the student toopen the account; inform the student of the terms of account prior to opening; ensure the student does not incur costs inopening account or receiving a debit or ATM card; and ensure the student has “convenient access” to ATM or branch of the bank.
When a school opens a bank account for a student, regulations prohibit the school from subsequently converting the account or card to a credit card or credit instrument.
Credit balances that remain after the school applies Title IV funds to pay tuition, fees, and room and board must be paid to the student as soon as possible but (1) no later than 14 days after balance occurred if the balance occurred after first day of class;or (2) no later than 14 days after first day of class of a paymentperiod if balance occurred on or before first day of class of payment period.
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Federal Trade CommissionAct, Sec. 515 U.S.C. § 45Consumer FinancialProtection Act of 2010 (CFPBauthority regarding unfair, deceptive, or abusive acts orpractices)12 U.S.C. § 5531
Section 5 of Federal Trade Commission Act (FTC Act) prohibits unfair or deceptive acts or practices.
The Federal Trade Commission (FTC) has FTC Act jurisdiction over financialproducts and services offered by entities other than banks, thrifts, federalcredit unions, certain nonprofit organizations, and those specificallyexempt from FTC jurisdiction.
The Office of the Comptroller of the Currency, Board of Governors of theFederal Reserve System, and FDIC have FTC Act jurisdiction for financialinstitutions they regulate.
The Dodd‐Frank Wall Street Reform and Consumer Protection Act, whichcreated CFPB, gives the agency enforcement authority over unfair, deceptive, or abusive acts or practices by covered persons or serviceproviders.
An act or practice may be unfair if it causes, or is likely to cause, “substantial injury” to consumers; is not reasonably avoidable; and anyinjury is not outweighed by benefits to consumers or competition.
Using FTC standard for deception, CFPB may find acts or practices deceptive if the representation, act, or practice is material and misleads oris likely to mislead a consumer, and the consumer’s interpretation is reasonable under the circumstances.
CFPB may declare an act or practice “abusive” if (i) it “materially interferes”with a consumer’s ability to understand terms of a financial product or (ii)if it takes unreasonable advantage of the consumer’s (a) lack of understanding of thematerial risks, costs, or conditions of a product, (b) aconsumer’s inability to protect his/herself in selecting or using thefinancial product, or (c) consumer’s reasonable reliance on a person to act in the interests of the consumer.
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Regulation P(privacy provisionsof Gramm‐Leach‐Bliley Act)12 C.F.R. Part 1016
Initial disclosure of a privacy policy must be madewhen customer relationship for purchase of financial product or service is established with an institution.
Financial institutions also must annually explain their data‐sharing process and providecardholders with an opportunity to opt out ofcertain information‐sharing arrangements.
An institution of higher education that complieswith FERPA and also is a financial institutionsubject to FTC’s enforcement jurisdiction is deemed to be in compliance with Regulation P.
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Other regulatory considerations:
• We also have BSA rules on Prepaid cards to run CIP and some providers have to register as MSBs.
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What fees do you have on students?
• Monthly Service Charge
• ODP
• Credit Cards
• Debit Cards
• Wire Transfers
• Stop payments
• Loans
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Instructor Susan Costonis, CRCM
• Susan Costonis is a compliance consultant and affiliate trainer for gettechnical, inc. Her banking and training experience began in 1978 working for institutions ranging from multi-state bank holding companies to community banks with a focus in lending regulations and compliance management. She completed the ABA Graduate Compliance School, and the Graduate Banking School of the University of Colorado.
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Part II –Easing Student Loan Debt For All Students
• In June of 2014, President Obama issued a Presidential Memorandum directing the Department of Education to propose regulations to ease the burden of student loan debt.
• Today's publication of the Revised Pay As You Earn (REPAYE) Plan regulations responds to that directive by expanding repayment options to allow five million more Direct Loan borrowers to cap their monthly student loan payment amount at 10 percent of their annual income allocated per month, without regard to when the borrower first obtained their loans.
• The Department announced the proposed regulations earlier this year.
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Easing Student Loan Debt For All Students
• Starting in 2016; an expansion of the circumstances under which institutions may challenge or appeal a cohort default rate that appears artificially high because of a corresponding low rate of student borrowing;
• Starting July 1, 2016; new procedures for FFEL Program loan holders to identify service members who may be eligible for a lower interest rate under the Servicemembers Civil Relief Act (SCRA), enabling these borrowers to receive this important benefit automatically.
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Easing Student Loan Debt For All Students
• A requirement that guarantors provide information to FFEL Program borrowers on repayment plans available to them after they rehabilitate their defaulted loans, to help ensure that borrowers have a smoother transition to regular repayment. This section of the regulations will be implemented July 1, 2016.
• And a provision to allow lump-sum payments made on behalf of borrowers through student loan repayment programs administered by the Department of Defense to count toward Public Service Loan Forgiveness, similar to the application of lump sum payments for Peace Corps and AmeriCorps volunteers. This action assures that these borrowers benefit more fully from their public service employment.
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Student Loans vs. Consumer Loans
Student Loan Debt
• Students borrow funds based on future income
• Repayment ability is impacted by the quality of education that provides future income
• Payments are made over a long time period
• Education is EXPENSIVE! Average debt is $35,000
• Student loans are unsecured; there is no “collateral” to liquidate to help repay the debt
Consumer Loan Debt
• Consumer loan debt is based on current income and debts
• Payments are made on a short time horizon compared to student loans
• Many loans are secured by collateral, it can be refinanced based on asset value.
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Student Loan Options – CFPB
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Existing Federal Lending Regulations for Financial Institutions
• Truth in Lending (Regulation Z), Subpart F, has rules for “private education loans” (PELs) that became effective 2/14/2010.
• Coverage – PELs are consumer loans made in whole or in part for post-secondary educational expenses; excluding open-end credit, real-estate secured loans, higher education institutions for a term of 90 days or less, no-interest loans of a year or less.
• Three sets of disclosures are required and there is a right to cancel the PEL for up to 3 business days after final disclosures have been provided.
• NCUA issued Supervisory Letter 13-13 in December 2013
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CFPB Judgment Corinthian College
• September 16, 2014 CFPB sued Corinthian for luring students into taking out private loans, “Genesis Loans, to cover expensive tuition costs, based on misrepresentations about employment outcomes for students.
• February 3, 2015 the CFPB announced that $480 million was secured in debt relief for current & former Corinthian students
• October 28, 2015 the CFPB announced a default judgment based on unfair, deceptive & abusive acts and practices and illegal debt collection tactics. The court ordered that Corinthian was liable for more than “$530 million and prohibited the company from engaging in future misconduct”
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History of Student Loan Programs
• 2007 Congress created the income-based repayment option (IBR); offers forgiveness to borrowers after 25 years and requires 15% of income above exemption levels; and Public Service Loan Forgiveness (PSLF) provides full forgiveness for working in public service for ten years.
• 2010 (part of Affordable Care Act), changed to 10% of discretionary income and forgiveness after 20 years.
• 2011, Executive Order “Pay as you Earn” (PAYE) option.
• October 27, 2015 – two new rules; Part I “Protecting Students & Federal Aid”, Part II – Easing Student Loan Debt for All Students”, known as REPAYE
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Who is impacted by the REPAYE Rules in Part II?
• “These final regulations in large part affect loanrepayment options and processes, so they wouldlargely affect student borrowers, the Federalgovernment, and loan servicers” (see RegulatoryImpact Analysis section); these are direct loanborrowers
• Reminder – The Corinthian judgment taken by theCFPB targeted deceptive marketing AND debtcollection tactics. These areas should be carefullyreviewed if your financial institution or AFFILIATESservice student loans.
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REPAYE Plan
• REPAYE will be available to all Direct Loan student borrowers on an IDR plan with payments based on 10% of discretionary income
• Borrowers with only undergraduate loans will have a 20 year repayment period.
• A Direct PLUS Loan made to a parent borrower, or a Direct Consolidation Loan that repaid a parent PLUS loan, may not be repaid under the REPAYE plan.
• One benefit of REPAYE over all other income dependent repayment plans is that REPAYE eliminates the requirement for a partial financial hardship entirely.
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Calculating the Payment Due Under REPAYE
• Payments are set at 10% of discretionary income, even if that leads to a higher payment than under a standard repayment plan.
• Discretionary income is calculated as 150% of adjusted gross income minus 150% of poverty line for the borrower’s state and family size
• There is a potential process that may allow the Department of Education to access IRS or other federal information to recalculate monthly payment amounts with the borrower’s consent
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Calculating the Payment Due Under REPAYE
• Married borrowers who file a separate Federal income tax return must use the adjusted gross income that includes the income of the spouse to calculate the monthly payment amount. A married borrower filing separately who is separated from his or her spouse or who is unable to reasonably access his or her spouse’s income is not required to provide his or her spouse’s AGI.
• In cases where couples have separated their finances and the joint AGI reported on the Federal tax return is no longer applicable, alternative documentation of income will be permitted. If this approach is used, the spouse will be excluded from the determination of family size regardless of the tax filing status of the borrower and the spouse.
• This differs from how payments are calculated under PAYE, IBR, and ICR. Under those plans, married borrowers who file their Federal income taxes separately exclude their spouse’s income from payment calculations yet include their spouse in their family size. This results in an artificially low monthly payment for married borrowers who earn a low income and file taxes separately even if his or her spouse is a high income earner.
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Effect on Interest Accrual and Negative Amortization
• REPAYE places limits on the interest charged to a borrowers to 50 percent of the remaining accrued interest when monthly payment is not enough to pay the accrued interest (resulting in negative amortization). This limitation applies after the consecutive three-year period during which the U.S. Department of Education doesn’t charge the interest that accrues on subsidized loans during periods of negative amortization.
• Though the same three-year period exists for subsidized loans under PAYE and IBR, there is no limit on the interest charged. Therefore, many loans paid through PAYE and IBR negatively amortize.
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Student Loan Forgiveness After REPAYE
• Borrower who are repaying only loans received to pay for undergraduate study through REAYE will have be eligible for loan forgiveness. The remaining balance of loans repaid under the REPAYE plan is forgiven after 20 years of making qualifying payments.
• However, if a borrower has at least one loan through REPAYE that was received to pay for graduate study, the remaining balance is forgiven after 25 years of qualifying payments.
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Requirements to remain in “REPAYE”
• If a borrower is in the REPAY plan and doesn’t provide the income information required to recalculate the monthly repayment account they will be placed in an alternative repayment plan.
• The monthly payment amount under the alternative repayment plan will equal the amount required to pay off the loan within 10 years from the date repayment began under the alternative repayment plan, or by the end date of the 20- or 25-year REPAYE plan repayment period, whichever is earlier.
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Requirements to remain in “REPAYE”
• Borrowers are allowed to return to the REPAYE plan if the income information is provided for the period of time that for payments being made in the alternative repayment plan or another repayment plan.
• If the required payments under the alternative repayment plan or the other repayment plan are less than the payments that would have been required to make under the REPAYE plan, the monthly REPAYE payment amount will be adjusted to ensure that the excess amount owed is paid in full by the end of the REPAYE plan repayment period.
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Requirements to remain in “REPAYE”
• This is to discourage borrowers from intentionally failing to report their income accurately when they experience a significant increase in earnings.
• This system is contrary to current IBR, ICR and PAYE – which mandates that borrowers will be permanently removed from the program unless the financial hardship can be proven.
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REPAYE – Public Service Loan Forgiveness
• Payments made under the alternative repayment plan will not count as qualifying payments for purposes of the Public Service Loan Forgiveness Program, but may count in determining eligibility for loan forgiveness under REPAYE, ICR, IBR, or PAYE if borrowers return to the REPAYE plan or change to another income-driven repayment plan.
• Borrowers who made qualifying public service loan forgiveness payments on an eligible Direct Loan Program loan under the IBR plan and later begin repaying that loan under the REPAYE plan are allowed to have the prior payments that were made under the IBR plan still count toward public service loan forgiveness.
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REPAYE – Public Service Loan Forgiveness
• As with other income dependent plans, if the borrower consolidates loans on which they made qualifying payments under an IDR plan into a Direct Consolidation Loan, there is no credit toward loan forgiveness for the pre-consolidation payments and borrowers would be required to make an additional 20 or 25 years of qualifying payments before receiving loan forgiveness on the new Direct Consolidation Loan.
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Resources for Public Service Loan Forgiveness Program - PSLF
• Federal Student Aid website has many PSLF resources• What is qualifying employment?• What is considered full-time employment?• Which types of federal student loans qualify for PSLF?• What is a qualifying monthly payment?• What is a qualifying repayment plan?• How do I know I’m on the right track to receive PSLF?• Will I automatically receive PSLF after I’ve made 120
qualifying monthly payments?• Examples of qualifying employment: federal, state, local, tribal
government organizations, 501(c)(3) and other not-for-profit organizations that provide certain public services
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Tax Issues for Forgiven REPAYE Balances
• Under current tax law, any loan amount forgiven under the terms of the REPAYE plan or any other IDR plan is treated as taxable income.
• In the comments, the US Department of Education states that it “is supportive of a change in tax law so that loan amounts forgiven under the income-driven repayment plans would no longer be treated as income. However, such a change would require action by Congress.”
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Servicemembers & CFPB Report
• The CFPB released a report on July 7, 2015Servicemembers still struggling to obtain
SCRA protectionsActive-duty servicemembers’ loans sent to
collections due to servicer errorsDisabled veterans and families of
deceased servicemembers encounter frustrations
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Part 682 –Federal Family Education Loan (FFEL) Program
• Permissible charges by lenders to borrowers for interest rates in the FFEL program
• Lenders must use the official electronic database maintained by the Department of Defense (DOD) to identify all borrowers with an outstanding loan who are members of the military service and ensure the interest rate on a borrower’s qualified loans with an outstanding balance does not exceed the six percent maximum interest rate
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SCRA Website
• The Department of Defense operates a website to submit a single record request or multiple record requests to determine if a service member is on active duty status
• Effective July 1, 2016 lenders MUST use this resource to determine if a service member is on active duty under the FFEL program so servicemembers receive the lower interest rate automatically rather than requiring the service member to notify the lender and request the rate reduction.
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Due diligence in servicing a loan
• Effective July 1, 2016 a lender is required to use the DOD identify borrower who are military servicemembers
• Confirm the dates that military service and limit the interest rate to six percent for longest eligible period
• Borrowers can provide alternative evidence of military service if they believe the DOD is inaccurate
• Lender must send written notice within 30 days that the interest rate has been reduced to six percent during the borrower’s period of military service
• For PLUS loans with an endorser, lender must use the DOD to begin, extend or end the six percent rate based on the borrower’s or endorser’s military service.
• If the borrower and endorser are both eligible for six percent, lender must use the earliest start date of either party and the latest end date for the SCRA rate.
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DOD Payments and PSLF
• The new rules have a provision to allow lump-sum payments made on behalf of borrowers through student loan repayment programs administered by the Department of Defense to count toward Public Service Loan Forgiveness (PSLF), similar to the application of lump sum payments for Peace Corps and AmeriCorps volunteers. This action assures that these borrowers benefit more fully from their public service employment.
• See 685.219 Public Service Loan Forgiveness Program for details.
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Application to financial institutions:Questions and Issues
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Susan
What is the coverage of this new rule?
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Protecting Students and Federal Student Aid
• The amendments are intended to ensure that students have convenient access to their title IV, HEA program funds, do not incur unreasonable and uncommon financial account fees on their title IV funds, and are not led to believe they must open a particular financial account to receive their Federal student aid.
• The rule takes effect on July 1, 2016, with mandatory compliance dates for selected provisions on September 1, 2016, July 1, 2017, and September 1, 2017.
• The final rule imposes significant restrictions on bank accounts offered to students under an arrangement between a bank and a college or university
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Easing Student Loan Debt - REPAYE• Starting in 2016; an expansion of the circumstances under
which institutions may challenge or appeal a cohort default rate that appears artificially high because of a corresponding low rate of student borrowing;
• Starting July 1, 2016; new procedures for FFEL Program loan holders to identify servicemembers who may be eligible for a lower interest rate under the Servicemembers Civil Relief Act (SCRA), enabling these borrowers to receive this important benefit automatically.
• A requirement that guarantors provide information to FFEL Program borrowers on repayment plans available to them after they rehabilitate their defaulted loans, to help ensure that borrowers have a smoother transition to regular repayment. This section of the regulations will be implemented July 1, 2016
• Lump-sum payments from the Department of Defense will count toward Public Service Loan Forgiveness.
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Are there any other Regulations affected?
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Possible Considerations
• In view of the CFPB scrutiny on student lending and the Corinthian judgment, financial institutions who make lend to college students should pay particular attention to potential issues with UDAAP and with debt collection practices
• Service members currently have protections under the SCRA; there are additional requirements in the REPAYE portion of the changes that outline specific restrictions include interest rate reduction to six percent.
• The CFPB has also raised concerns about the accuracy of the reporting of student loans to credit reporting agencies under FCRA and Regulation V
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What are the new restrictions?
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Protecting Students and Federal Student Aid
• Students may choose HOW to receive federal aid. • Prohibit institutions from requiring students or parents to open a certain
account into which their credit balances are deposited. • Require institutions to ensure that students are not charged overdraft
fees if students select an account offered directly or indirectly by contractors that assist institutions in making direct payments of federal student aid.
• Require an institution to provide a list of account options that a student may choose from to receive credit balance funds, where each option is presented in a neutral manner and the student's preexisting bank account is listed as the first, most prominent, and default option.
• Require institutions to ensure electronic payments made to a student's preexisting account are as timely as, and no more onerous to the student than, payments made to accounts marketed through the institution
• Limits information sharing with third-party services and protects private student information.
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Easing Student Loan Debt - REPAYE
• Repayment options will change according to the new rules
• Lenders must check the Department of Defense SCRA website to determine active duty status of Servicemembers and reduce the rate to six percent and send a written notice
• Provisions for loan forgiveness for public service are updated.
• Provisions for loan rehabilitation
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Are there new disclosure requirements for fees or other
charges?
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Protecting Students and Federal Student Aid
• Written notice that the student is not required to open an account or have an access device issued by a specific financial institution
• Payment delivery options must done in a “clear, fact-based, and neutral manner”
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Easing Student Loan Debt - REPAYE
• Notify servicemembers that their interest rate has been reduced to six percent when it is determined by the lenderthat their active duty service dates have been determined by checking the Department of Defense (DOD) website for SCRA.
• Servicemembers may provide alternate documentation if they believe the DOD information is inaccurate.
• There are loan rehabilitation agreements for certain loans. The borrower must voluntarily make at least 9 of the 10 payments under the repayment agreement. Students who have defaulted may be eligible for loan rehabilitation. After the loan has been sold to an eligible lender or assigned to the Secretary of Education the borrower must be given a notice within 15 days of determining the payment amount and a written rehabilitation agreement with the required disclosures.
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Are there new processing requirements?
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Protecting Students and Federal Student Aid
• Reasonable access to fee-free ATMs or a surcharge-free ATM network.
• Prohibition on POS and overdraft fees
• Timely payments are required, see disbursement rules in 668.164
• Subpart K has numerous rules for Cash Management
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Direct Payment Changes
• Students and parents must be given 3 options for direct payment1. EFT to Student or Parent’s financial account
2. Issuing a Check
3. Dispensing cash with a signed receipt.
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Easing Student Loan Debt - REPAYE
• There are rules for the calculation of the repayment of the loan according to new standards.
• There are several requirements for loan rehabilitation.
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What are the impacts to the marketing strategy for this target
market?
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Marketing Changes
• Students must be able to CHOOSE a financial institution and the delivery method for direct payments. Student must be given a list of options for receiving credit balance funds in a neutral manner; materials must list pre-existing accounts as the first, and most prominent, option, with no option preselected.
• If the marketing information includes repayment information it should reference the new rules for REPAYE.
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Are there specific new advertising rules?
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T2 Arrangements
• Institutions are subject to disclosing contract data, ATM requirements and the best interest sections of the new rules if five percent or more of the total number of students enrolled at the institution received Title IV credit balance, or the average number of credit balance recipients for the three most recently completed award years is 500 or more.
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What are the impacts of new rules for student bank cards?
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Student Choice
• Student choice of the account or consent required to open account before:
• Providing information about student to financial account provider
• Sending access device to student
• Associating student ID with a financial account
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What is the regulatory guidance for banking the student population?
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Guidance & Resources
• The CFPB has published an article on STUDENT LOAN SERVICING in the 11/3/15 Supervisory Highlights at this link: http://www.consumerfinance.gov/reports/supervisory-highlights-fall-2015/
• The article mentions– UDAAP concerns
– Allocating Partial Payments
– Issues Involving Payment Systems
– Misrepresentations regarding dischargeability of student loans in bankruptcy
– Misrepresentations about late fees
– Best practices for paying off student loans
– Credit reporting policies and procedures for reporting student loans
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Guidance & Resources
• The CFPB published are report on Student Loan Servicing on September 29, 2014. There is a link to the 151 page report: http://www.consumerfinance.gov/reports/student-loan-servicing/
• The joint statement of principles from the CFPB, Department of Treasury and Department of Education outline the following for servicing student loans:– Consistent expectations for minimum requirements and communication
– Accurate and actionable: Servicers provide information in this manner
– Accountable – Servicers are accountable for fair, efficient and effective treatment; law enforcement possible for recourse
– Transparent – practices are public, and complaints are handled, including data.
• Resources for service members from CFPB: http://www.consumerfinance.gov/servicemembers/
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Are there additional pending proposals on the use of debit cards?
What about credit cards?
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• Proposed Reg E Changes on Prepaid Cards
• Separate fees for POS and Signature Based Transactions
• Show fees for in-network and out of network transactions
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Can we charge students overdraft fees?
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• Increased criticism of government funds being used to pay bank fees.
