What New DOE Cash Management Regulations Mean for Higher Ed

The U.S. Department of Education (DOE) announced final cash management regulations in late October in an effort to protect students and federal student aid—but what will be the cost to colleges and universities, which have already been burdened with numerous regulations?

These regulations make sweeping reforms to campus credit cards. Over the past 10 years, the student financial product marketplace has changed significantly. The way students receive Title IV funds has changed to more convenient electronic methods and prepaid or debit cards through a financial institution. Sometimes these cards are even combined with student IDs. The Federal government estimates that approximately $25 billion dollars in Pell Grant and Direct Loan program funds are annually released to 9 million students at institutions using these accounts.

Government and consumer groups have documented troubling practices that have led to these changes to cash management regulations. Consumer Union, the policy and advocacy arm of Consumer Reports, reported excessive fees, aggressive marketing strategies, and very limited transparency related to partnerships. Consumer Union raised issues with the increase of campus debit and prepaid card accounts being offered to students in exchange for monetary and other benefits to schools.

“It is critically important to ensure that students can freely choose how to receive their federal student aid refunds,” U.S. Under Secretary of Education Ted Mitchell said in a statement from the DOE in May. “Students need objective, neutral information about their account options. For example, students should be able to choose to receive deposits to their own checking accounts and not be forced to utilize debit cards with obscure and unreasonable fees.”

The new regulations handed down from the DOE make sweeping reforms to campus credit cards and financial aid disbursements, adding to the changes educational institutions must implement. Under the new rules, students have greater choice about how to receive their financial aid, more account options, and no requirements for students or parents to open a specific account to receive aid—safeguarding their personal information and protecting them from incurring excessive fees. But access, choice and transparency for the student will result in more compliance and regulation for the college and university.

Highlights of the New Regulations
The proposed regulations would require that colleges and universities who choose to partner with a financial institution do so under one of two types of arrangements, as follows:

A Tier One (T1) arrangement is between an institution and a third-party servicer that performs one or more of the functions associated with processing direct payments of Title IV funds on behalf of the institution and that offers one or more financial accounts to students and parents.

A Tier Two (T2) arrangement is between an institution and a financial institution or entity that offers financial accounts through a financial institution under which financial accounts are offered and marketed directly to students or their parents.

The regulations would:
  • 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, and
  • 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.
In short, schools need to understand what type of student information is being shared with the financial institution to ensure that the privacy of the student is protected, and they must also offer accounts that do not expose the students and their parents to costly fees. While these regulations may pose a hurdle for schools, ultimately, they are in line with schools’ desire to protect students.

In addition to these changes in cash management rules, two other changes may have a significant impact on colleges and universities.

Rules for Repeating Coursework
  • The rules allow an institution offering term based programs to count, for enrollment status purposes, courses a student is retaking that the student previously passed, up to one repetition per course, including when a student is retaking a previously passed course due to the student failing other coursework.
Clock-to-Hour Conversions
  • The regulations streamline the requirement governing clock-to-credit hour conversion by removing the provisions under which a state or federal approval or licensure action could cause a program to be measured in clock hours.
For the two latter requirements, schools need to make sure their systems have the capability to track rules for repeating coursework and clock-to-credit hour conversions.

Where Should Schools Begin?
The new rules go into effect on July 1, 2016, so there is some time to prepare. Schools should begin by working with their financial institution to understand what steps it is taking in light of the new regulations, and then review and amend agreements to ensure they are in compliance.