New Restrictions on Student Loan Disbursements

October 28, 2015 at 7:16 am Leave a comment

Good morning blog readers, with a special shout out to you sleep-deprived Mets fans who stayed up to watch your team lose in one of the longest games in the history of the World Series. Devastating loss.

The U.S. Department of Education finalized regulations yesterday clamping down on agreements between financial institutions and colleges under which student aid payments are steered toward specific debit and prepaid cards.

According to the U.S. Department of Education, colleges and universities enrolling about 40% of college students have debit or prepaid card agreements. Nearly $25 billion in Pell grant and Direct Loan program funds are annually released to students using these accounts. Critics of these arrangements argue that they are a way to steer business to favored financial institutions and that these accounts often come with hidden fees. Under the regulations announced yesterday colleges and universities will be required to give students greater flexibility in how they receive their student aid and they will also be prohibited from mandating that students or parents open favored accounts into which student aid is deposited. To help facilitate a more open process, students and parents will also be receiving a list of account options from which they may choose.

I haven’t read the final regulation yet, but in concept I really like it. Credit unions and other smaller institutions have historically been shut out of the student loan market and these marketing agreements are nothing more than the perpetuation of these efforts following the government’s decision to take more direct control of student lending. Furthermore, the college years are a potentially critical time to start establishing member relationships. This proposal will at least give more of you a fighting chance.

Of course, the larger issue is whether a system that generates more than $1.2 trillion in debt to be repaid by young people just as they are starting their careers makes sense. But at least this starts to nibble around the edges of what is a serious problem.

Entry filed under: Compliance, Regulatory. Tags: , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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