The Obama administration on Tuesday finalized two separate rules to prevent college students from ending up in financial trouble while they’re in school and once they leave.
Starting next fall, colleges can no longer force students to have their federal aid dispersed on prepaid or debit cards that charge fees for overdrawing the accounts. Colleges use so-called campus cards to issue what are known as credit balances, the money left over when a student’s financial aid award exceeds the tuition and fees owed to the school.
Schools outsource the processing of that money to banks and other financial firms in exchange for millions of dollars in contracts. But some of the cards come with fees that can eat into student aid, including fees for card purchases using a PIN number rather than a signature.
Consumer advocates have railed against the way schools act as middlemen for their financial partners, steering students into products, instead of presenting unbiased information about their options.
Now, colleges will have to provide students a list of account options to receive excess tuition funds, with each option presented in a neutral way. A student’s preexisting bank account must be listed as the first, most prominent and default option. And students who elect to receive credit balances on a campus card cannot be hit with fees for overdrawing the account.
“The regulations will help protect students from unreasonable account fees, safeguard taxpayer dollars, provide transparency,” Education Undersecretary Ted Mitchell said on a call with reporters Tuesday.
According to the Education Department, nine million college students across the country are enrolled in schools that have debit or prepaid agreements. Those schools use the cards to disperse about $25 billion in Pell Grants and federal student loans to students every year.
In a separate move, the department completed regulation that expands the most generous student loan repayment plan to an estimated five million more Americans. The program, known as Pay as You Earn or PAYE, caps borrowers’ monthly bills to 10 percent of their income and forgives the debt after 20 years of payment.
It’s only been available to people with especially low income relative to their debt and who took out their loans after 2007. Starting in December, the revised plan (REPAYE) will be open to all loans made directly by the government. People with bank-based federal loans that were phased out in 2010 can consolidate their debt into a direct loan to be eligible for the plan.
Letting more people peg their monthly loan payments to a small share of their income will mean raising the cost of an already expensive program. Expanding the repayment plan will cost an estimated $15.4 billion, increasing the entire program’s current cost by 8 percent.
Still, the government’s repayment plans have become critical in keeping people from falling behind on their monthly student loan bills, a problem for one in four borrowers, according to the Consumer Financial Protection Bureau.
“The final REPAYE rule includes provisions to ensure that we are targeting benefits to the neediest borrowers, while protecting against institutional practices that may further increase student indebtedness,” Mitchell said.
Under the revised plan, people whose monthly payments fail to cover the interest on their debt will now have only half of the unpaid interest tacked onto their loan balance. Married borrowers can no longer lower their payments by excluding their spouse’s income, unless they are separated or victims of domestic abuse.
Anyone who borrowed for graduate school will have to make payments for 25 years, five years longer than everyone else, to have their remaining balance forgiven. That change may quiet concerns over grad students, who tend to borrow and earn more, taking advantage of the generous plan.
There will now be five different student loan repayment plans tied to income, but Congress may consolidate and streamline the options during the reauthorization of the Higher Education Act later this year.
Despite a slow start, there has been an increase in the number of people signing up for income-driven plans. Use of the plans has gone up 56 percent since last year, with 3.9 million borrowers enrolled, according to the Department of Education. Anyone interested in enrolling can learn more about their option at www.studentaid.gov.
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