Negotiated Rulemaking Update: Negotiations on Cash Management Stay Narrow; PLUS Loan Credit Check Controversial

February 21, 2014

Prepared by: Harrison Wadsworth (hwadsworth@wpllc.net)

The Department of Education’s latest regulation writing session, negotiated rulemaking, on “program integrity” issues got underway on Wednesday in Washington, with Thursday devoted to a contentious issue – cash management rules for federal student aid funds. The negotiating committee picked by the Department for the process includes a broad array of perspectives, and those perspectives were revealed at various times during Thursday’s discussion.

On Friday, the Department brought up the issue of updating and clarifying the definition of adverse credit history that would prevent a parent or graduate student from receiving a PLUS loan.  According to Pam Moran of the Department, the regulations have not been updated since 1994 soon after the PLUS Loan Program was created.  She and Department attorney Brian Siegel said that the Department does not have the authority to add requirements to borrowing PLUS loans beyond a check for adverse credit history.

Moran also said in response to several negotiators that the Department does not calculate cohort default rates for PLUS loan borrowers.  She said the Department would consider attempting to do so and providing that information by the next round.

The cash management discussion focused on the distribution of “refunds” of federal student aid funds to students.   This focus on issues directly related to distribution of federal dollars to students was considered a positive development in that there was concern that the Department is considering trying to regulate the much broader area of all arrangements between banks and colleges.  The Consumer Financial Protection Bureau, however, remains interested in the broader topic although it has not proposed regulatory changes so far.

During the first of the three rounds of negotiations, the non-federal negotiators are asked to provide their views and background information on the topics up for negotiation, with the Department’s negotiators not providing their views other than on questions of law or scope of the discussions.  Before the second round of negotiations in mid-March, the Department will provide the draft regulatory changes that it is proposing.  At that time the true scope of the regulatory direction the negotiations will take will be revealed.

After the second round of negotiations the Department will make changes to its draft and put the revised regulations on the table for the final round of negotiations, at which time the Department and all the negotiators will attempt to reach consensus on the regulatory changes.  Because of the diversity of views among the negotiators, that seems unlikely in this case, but it is possible.  The non-federal negotiators include representatives of consumer groups, state attorneys general, institutions of higher education of various types, and businesses that provide services to institutions.

The PLUS discussion revolved around whether the Department should tighten or loosen its definition of adverse credit.  Representatives of consumer groups wanted tighter standards, citing examples of parent borrowers whose children did not get a good education, leaving the parent with large debts that are extremely difficult to discharge in bankruptcy.  They were countered by representatives of minority serving institutions and other institutional representatives who emphasized that PLUS loans are the only way many students from low-income backgrounds have a chance to attend college.   A president of historically black college said that the sudden loss of students and income caused serious, long-lasting financial hardship for his institution and for many other HBCUs, as well as other minority serving institutions.  He urged the negotiators not to be too paternalistic towards parents of college students.

A consumer advocate said that in many cases, students and their parents are better off when rejected for PLUS loans since students are forced to go to lower- cost universities and the families take on less debt.

Several negotiators suggested conditioning all or part of PLUS eligibility on a bank-like calculation of ability to pay, or of requiring parents and students to go through a financial education process before receiving PLUS funds, but Siegel, the Department’s attorney, said PLUS can’t be conditioned on the parent borrower taking counseling, nor could predicted ability to repay be considered.

Most negotiators agreed that in the future, changes to eligibility should only apply to new borrowers so that the experience of 2013 would not be repeated, where parents and graduate students whose circumstances had not changed lost loan eligibility with a student partway through school.  Department officials apologized for the lack of communication about the 2012-13 changes.

Much of the discussion Thursday on cash management issues centered on the use of debit cards to distribute funds to students.

A report created by the consumer advocacy group US PIRG in 2012 that criticized campuses for making arrangements with providers of debit cards that charged fees in some cases was brought up, and a PIRG negotiator cited it in attacking card companies as well as colleges.   The PIRG negotiator said that institutions of higher education cannot be trusted to have their students’ best interest in mind so that government regulations are needed to protect them.  That idea drew a rebuttal from a college president at the table representing minority-serving institutions.  One idea floated several times was the creation of a special government debit card or pre-paid card that would be used for federal aid refunds.

In general, the negotiators, including the consumer groups other than PIRG, focused on offering students choices in how they receive their refunds with no campus-selected option or vendor favored in materials presented to the student.  A representative of a provider of software to enable direct deposit of refunds, advocated for that approach and attacked the use of debit cards.

An administrator from a four-year public university praised the relationship her campus has with a bank, where students are encouraged and helped to set up checking accounts into which their refunds are deposited.

Concerns were raised by several negotiators over unbanked and unbankable students for whom a checking account with direct deposit of funds is not an option.  Negotiators seemed not to favor the use of check cashing services for those students, but it wasn’t clear if a viable alternative exists.  One school negotiator wryly suggested bit coins while some off line (tongue in cheek) conversations discussed just giving students cash in order to avoid regulatory entanglements.

The issue of whether students should ever have to pay fees to use debit cards appeared as one where there are clear disagreements, with several of the consumer groups saying no fees should ever be charged to withdraw federal aid funds.  Representatives of some of the colleges said that they thought it fairer for those who wish to use debit cards to pay their cost rather than require everyone to pay and that paying to use out of network ATMs, for example, is normal.

The next round of negotiations will be March 26-28. The list of negotiators along with the Department’s short introductory papers on the six issues up for negotiation are available online: http://www2.ed.gov/policy/highered/reg/hearulemaking/2012/programintegrity.html