A government plan to partner with financial institutions to issue students a prepaid card with some of their loan dollars has consumer advocates concerned.
The Office of Federal Student Aid released a draft solicitation for proposals this month for companies interested in participating in a pilot program to create a card student-loan borrowers could use to access some of their money. The card aims to make it easier for borrowers to manage their refunds — the money that’s left over after a college applies the loan to billable charges, like tuition and fees.
Wayne Johnson, the head of the Office of Federal Student Aid, described the product as a “very robust payment instrument” with no fees that marries a variety of banking technology, including peer-to-peer payments and security alerts. “There’s no other product like it in existence today,” he said.
But consumer advocates worry that the plan opens up borrowers and their data to financial institutions at a particularly malleable time in their lives. It will amount to an “implicit endorsement” of the chosen company and its services, said Colleen Campbell, the associate director for post-secondary education at the Center for American Progress, a left-leaning think tank.
Indeed, once a financial institution gets a hold of a customer, it’s relatively rare for them to switch. The Department’s solicitation says as much, noting: “This will, in all likelihood, be the first financial services product introduced to a student which could then lead to a long-term, even life-long, relationship for other financial services and products.”
Campbell called this “disturbing.” He worries that the card’s features, which are intended to nudge students towards more responsible spending of their loan dollars, could actually put borrowers struggling to afford school in a vulnerable position by steering them towards certain retailers.
Many students struggle to stretch their student-loan dollars
Despite anecdotes of borrowers spending student loan money on spring break trips, the reality is that many students actually struggle to stretch their student-loan dollars to cover their expenses. This can be a challenge for low-income students in particular, whose tuition may often be covered by grants, but have to find a way to afford rent and food.
“FSA is taking an orientation that students’ troubles financially are due to them improperly spending their financial aid money rather than students just not having enough money to get by,” Campbell said.
The technology may have the capability to restrict certain types of purchases. But Johnson said the Department doesn’t plan to deploy that technology to steer students towards certain categories of spending. Instead, students may be nudged away from certain purchases through text messages and other reminders, he said.
Johnson, who worked as the chief executive of First Performance Corporation, a payment card technology company, before arriving at the FSA, said it will provide a more seamless student loan experience. Officials also hope the product will promote financial literacy among its users by providing borrowers. The Department, he said, is trying to encourage responsible behavior with taxpayers’ money rather than be “paternalistic” towards students.
This partnership could be a gateway to high-cost financial products
Right now, colleges send students their refunds in a variety of ways, including by issuing checks, directly depositing the money into their bank accounts or in some cases offering pre-paid cards.
Since 2016, the Department of Education has imposed strict rules on any partnerships between colleges and financial institutions in disbursing these funds after consumer advocates said for years that these arrangements were pushing borrowers towards products with unnecessarily high fees.
For example, colleges are now required to present students with all of their options for disbursing the funds, including their own pre-existing bank account, together. Higher One, once a leader in this space and accused of some of the most troubling practices, sold its financial aid disbursement business in the wake of the rules.
Consumer advocates worry that the card proposal is once again inviting financial institutions into this space to take advantage of a captive audience: Student loan borrowers, who may be using a financial product for the first time. The Department’s solicitation for proposals bans the company offering the card from charging students or their schools any fees, but the companies participating in this contract would still receive a huge financial win.
Students represent a ‘premier portfolio’ for financial services
Robert Manning, the author of “Credit Card Nation,” described the students receiving the card as a “premier portfolio” because they’re likely to be college-educated, relatively high income households. People typically do not shift from the first financial institution they’re introduced to. “To get your hands on this group of people is worth a lot of money,” he said.
The Department will present the “best” option to the students, he added. If students choose other financial products, “that will be an adult decision on their part,” Johnson said. And companies will also have to go through a rigorous vetting process, he added
The solicitation says borrowers must explicitly consent to companies using their data to market other products, but Manning remains concerned that borrowers may unwittingly consent to allowing companies to market to them.
“The Department of Education is essentially selling its access to millions of students to these companies saying to them that you will have the opportunity to sell your other financial services products,” Campbell said. “The federal government handing that power, that access, to one company or to any company, frankly is inappropriate.”