by Colleen Campbell
The passage of a massive tax bill and a reauthorization proposal of the Higher Education Act (HEA) of 1965 by congressional Republicans consumed postsecondary education circles at the end of 2017. But while all eyes were on Congress, the U.S. Department of Education announced two programs that could dramatically change how millions of Americans access and repay their federal student aid. It is important that these drastic changes not get lost in the shuffle of the new year, as they will have repercussions for years to come.
The first change came at the end of November, when A. Wayne Johnson, the chief operating officer of the Office of Federal Student Aid (FSA), announced plans to pilot a new federally issued prepaid card for student aid disbursements. While some colleges currently use a similar system, this is a new venture for the federal government that requires significant planning and infrastructure. Two weeks after its announcement, FSA posted a document outlining a new student loan servicing system complete with a single repayment platform for borrowers. But the plan is complex, broken into 13 major components, each with its own specifications. While these changes could benefit students, the devil is in the details. As it approaches these programs, FSA must prioritize choice and affordability for students; hold its contractors accountable; and give the public input on these matters.
FSA proposes prepaid cards for student aid disbursements
When students receive more aid than their tuition costs, the remaining money is given to students for rent, food, and books, among other expenses. Although students usually receive these funds through a check or direct deposit, some colleges partner with companies that provide students’ refunds on prepaid debit cards. While these cards may offer students without a bank account an easier way to use their federal aid money, some cards were less than beneficial for students. In the early days of prepaid cards, some students were charged a fee every time they swiped their card, could not locate a fee-free ATM, or were made to believe the cards were their only option. In 2016, the Department of Education placed much-needed regulations on prepaid debit cards, making them more student-friendly by limiting fees, requiring colleges to provide access to in-network ATMs, and ensuring debit cards were presented as one of many options.
Under FSA’s proposal, colleges will be able to opt into a new federally-managed prepaid card program. The card would allow students to pay for living expenses as well as send and receive money from parents or friends using the card balance. However, even Johnson’s experience in the private sector—both at Visa and, most recently, at a payment card company—is not enough to ensure the program’s success.
If FSA wants to successfully implement this prepaid card program, it must do three things. First, it should ensure that students are charged minimal fees to use their cards and that those fees are less burdensome than those charged by banks. The Department of Treasury, for example, issues DirectExpress prepaid cards that allow Social Security recipients to easily access their benefits. Treasury also negotiates the terms of this card with the provider, which can help protect benefits recipients from harmful terms.
Second, FSA and its vendor should keep students’ data private, not sell transaction data to third parties, and not turn a profit from students using the cards. The program should follow all current regulations on prepaid cards and ensure no student is forced or coerced into using the card. Finally, students should be free to spend their money at any type of merchant or for any type of purchase.
Unfortunately, restrictions on students’ purchases appear to be part of FSA’s plan. When Johnson announced the prepaid card program, he assured that colleges would be able to “set up controls of where, when, and how money is spent.” He claimed that these controls would be an important feature for “addressing the root cause of improper payments,” even accusing students of using their financial aid money to pay for tattoos.
Limiting how and where students spend their money is a paternalistic measure with potentially negative repercussions. With this level of control, colleges would likely restrict students’ purchases to certain merchant category codes that were created by the IRS in an attempt to classify businesses. However, these codes are often too narrowly defined—each major airline, for example, has its own code—or are flat-out misclassified. This could limit students’ access to necessary goods or force them to find other means to pay for their expenses.
Furthermore, each college would likely choose its own set of merchant codes, providing students at different colleges with varying access to items and services. It is easy to imagine a scenario where a college has a radically narrow definition of an educational expense and bars students from purchasing travel home, buying clothing, or even eating out. Students in this position would be left to find another way to buy what they need, potentially relying on a credit card or loans from another person. These students could also pay with cash, flouting the college’s restrictions and creating unnecessary barriers and work for the government, school, and student. Giving colleges discretion over this issue could lead to major problems down the road and likely do little to stem fraud or misuse of funds.
A new vision for loan servicing
On the same day that the House Education and Workforce Committee marked up the HEA reauthorization bill, FSA posted documents detailing what direction it would take in developing a servicing system for more than $1 trillion in federal loans. These documents are part of an ongoing and contentious process to sign new contracts with loan servicers.
In 2016, the Obama administration sketched out its plans for a new, student-centered servicing system. This past spring, FSA amended that plan, reducing protections for students and proposing to award the contract to a single company. After facing bipartisan opposition from Congress, FSA scrapped the contract and announced its plans to start anew.
But FSA’s latest vision for the student loan servicing system looks a lot like the one drafted by the Obama administration. For example, FSA’s proposal also includes a single platform from which all student-loan borrowers would manage their loans. Unlike the current system, where servicers can use their own logos, this single platform would be Department of Education-branded. The proposal also looks to streamline multiple processes—such as loan transfer, payment application, and customer service guidance—to create more consistency across the borrower experience and to generate cost savings from increased efficiency. These features have the potential to significantly improve the repayment process for borrowers by reducing servicing breakdowns and preventing some instances of delinquency and default.
Despite its similarities to the formerly proposed servicing system, FSA’s plan fails to address several crucial details. A big one is accountability.
In essence, FSA will create a much more complex system but will outsource oversight of the repayment of more than $1 trillion in outstanding debt to various private companies. Rather than have the Department of Education oversee vendor activity, the new solicitation would require contractors—some of whom may have little familiarity with the nuances of federal education debt—to ensure servicers properly manage accounts, mitigate risks, and complete projects to legal specifications. FSA, by contrast, would provide strategic direction and be involved with implementation as necessary. It would only be aided by a private value assurance manager—not consumer-focused watchdogs such as the Consumer Financial Protection Bureau, with whom it severed data-sharing agreements last summer.
While contractors are necessary in the servicing system, FSA’s role as the protector of students’ interests should be at the forefront of any loan-repayment plan. Federal student aid is an incredibly complex system that would be most effectively overseen by FSA employees and consumer-debt experts who have worked intimately and extensively with FSA’s repayment programs. It is difficult to predict how well contractors would perform the monitoring and oversight roles and if they would have the appropriate knowledge to judge whether certain issues should be brought to FSA staff.
The new proposal also deconstructs servicing as we know it, without input from the public. Today, loan servicers handle inbound calls, conduct customer outreach, collect and apply payments, and report data into federal systems—all of which is supported by infrastructure they either build or buy. With the new system, servicing would be broken down into discrete elements, with outbound calls, inbound calls, contact platforms, account processing, and reporting all separate. This setup could lead to certain vendors being the de facto choice for subsequent contracts—a choice based not on the quality of their performance but on the difficulty posed by shifting from one vendor’s complex technology to another’s.
What’s next for student aid?
It is uncertain whether FSA can accomplish it various goals within the aggressive timelines it has set out. The Department of Education plans to launch the prepaid pilot in 2018 and the servicing system by 2019. Thanks to a federal hiring freeze and voluntary buyoutsoffered by Secretary DeVos, however, FSA’s workforce has shrunk. Combined with other new ventures, it’s unlikely that the Department of Education will accomplish its ambitious vision while also ensuring students receive comprehensive and fully functional services.
As FSA moves forward, it should more realistically assess its capabilities and seek input from stakeholders to ensure that its limited time and money are not wasted. Furthermore, FSA should look to the expertise of advocates, researchers, and consumer groups to ensure that the features of the servicing system and prepaid card program are developed and implemented with students’ interests in mind. There have already been calls from Congress for FSA to further explain its plans, and it’s likely that more lawmakers will join the chorus in the months ahead. Time will tell how effective these initiatives are, but one thing is for sure: The federal student aid system is in for a big shakeup in the coming years.
Originally published in Center for American Progress