NACUBO Identifies Concerns with ED's Proposed Cash Management Rules

With the July 2 deadline for submitting comments rapidly approaching, NACUBO has identified numerous questions and concerns about the Department of Education's proposed rules on cash management. Most of the questions and concerns focus on new requirements that would be imposed on colleges and universities that have agreements with financial institutions or third-party servicers that include bank accounts, debit cards, or some other type of financial account offered to students and parents.

Understanding the potential impact of the rules on a college or university's practices requires a determination of what type of arrangement, under ED's new rubric, the institution has with a servicer or financial institution. NACUBO has developed a flow chart to help members understand key points in the proposal's definitions of Tier One (T1) and Tier Two (T2) arrangements.

Following are the most pressing concerns, in no particular order, identified to date by NACUBO staff in consultation with NACUBO's Student Financial Services Council, other members and association colleagues, and representatives of servicers and financial institutions. (Citations refer to the proposed regulatory language found on pages 28529-28536 of the Federal Register notice, as well as the page number for discussion in the notice's preamble.

Checks as an Alternative for Credit Balance Disbursements

NPRM would:

• Delete current §668.164(c)(3), which allows an institution to "establish a policy requiring its students to provide bank account information or open an account..." as long as this does not delay disbursement of Title IV funds. If a student fails to comply, the school still needs to cut a check within the 14-day time period.
• Add §668.164(d)(4)(i)(B)(4) requiring institutions with either a T1 or T2 arrangement to "include issuing a check as an option for a student or parent to receive payments." [Discussion on p. 28503]

Concern: NACUBO believes that electronic disbursements are better for students and parents (although many fewer schools have developed ways to provide direct deposit to parents than to students). EFTs are safer, cheaper, and faster than paper checks. Our survey research shows a steady trend toward direct deposit and away from paying credit balance by paper checks. NACUBO sees no reason to require any school to offer checks as an option, even if it has a T1 or T2 arrangement.

Provisions for Books and Supplies

NPRM would:

• Change §668.164(m) to require institutions to provide a way for Title IV-eligible students to obtain books and supplies by the seventh day of a payment period. [No discussion]

Concern: Existing regulations stipulate that an institution must provide book vouchers, credits, store charges, or some other way for Pell-eligible, not Title IV-eligible, students who will have a Title IV credit balance to be able to get their required books and supplies within the first seven days of the payment period. Many schools voluntarily apply the current standard to additional students and may already be in compliance with the proposed change. NACUBO is also concerned on procedural grounds because ED failed to mention this change in the preamble, and so stakeholders reviewing the NPRM might have missed it.

Payments by the Secretary

NPRM would:

• Add §168.164(d)(3) allowing ED to pay Title IV credit balance refunds directly to students using a method established or authorized by the Secretary of Education and published in the Federal Register. [Discussion on pgs. 28496-28497]

Concern: This proposed change is dangerously broad. It would significantly alter administration of the federal student aid programs, prompting massive changes for both the department and institutions of higher education. Any such proposal should be subject to negotiated rulemaking, as well as public review and comments. Further, having ED pay students directly would become more complicated and confusing for students because institutions would remain responsible for disbursing non-Title IV refunds, resulting in two parallel processes.

Existing Account as Default Option

NPRM would:

• Require, through §668.164(d)(4)(B)(1), an institution to list a student's existing financial account as the first and default option when selecting how to receive his or her Title IV credit balance refund. [Discussion on pgs. 28500-28501]

Concern: Listing an existing bank account first, among the choices for receiving Title IV credit balance refunds, makes it clear that a student is not required to use a sponsored account. It is unclear, however, what ED means by making that method the "default." If a student does not select how to receive the credit balance refund, a school would have no way to disburse - as the default method - to the student's existing account, because it would not have the account EFT information. If no method for receiving a refund is selected, the only way an institution can comply with the requirement to disburse credit balance refunds within 14 days is to issue a check and mail it to the address on file.

Threshold for T2 Accounts

NPRM would:

• Presume that Title IV funds are deposited into T2 accounts (therefore making the accounts of regulatory interest to ED) if at least one student at the institution received a Title IV balance the previous award year (§668.164(f)(2)). If not, the school would not have to comply with the requirements under §668.164(f)(4), including the reporting and disclosure requirements. The school presumably would still have to comply with the requirements under §668.164(d)(4), mandating a selection process for the method of credit balance disbursement. [Discussion on pgs. 28497-28,500]

Concern: ED has staked its right to regulate college or university agreements with financial institutions on the somewhat tenuous notion that Title IV credit balances are likely to be deposited in accounts related to such agreements. Further, the Department asserts its right to regulate T2 accounts if even one student enrolled during the previous year at the institution received a Title IV credit balance. This threshold is absurd and shows no effort to balance regulatory burden with intended benefits.

Inclusion of T2 Account Information in Selection Process

NPRM would:

• Require institutions with T1 or T2 arrangements to "list and identify the major features and commonly assessed fees associated with all financial accounts" related to those arrangements and to provide a URL to the terms and conditions of those accounts (proposed §668.164(d)(4)(i)(B)(2)). [Discussion on pgs. 28500-28501]

Concern: Some colleges and universities have T2 arrangements that are unrelated to credit balance disbursements and don't currently provide information about or even mention these T2 financial accounts to students as part of the credit balance disbursement process. In fact, for many of these schools, marketing of these accounts by the institution is minimal and may only involve information on a page related to the campus card options that students may link to accounts at a specific financial institution if they wish, and that more information is available from that bank (with a hyperlink). It is counterintuitive for ED, if it is truly concerned about schools foisting sponsored bank accounts on students, to require them to bring marketing for such accounts into the credit balance disbursement process.

Student Information Sharing with Third-Party Servicer or Financial Institution

NPRM would:

• Require schools to obtain a student's consent to open a T1 or T2 account before sharing any information about the student other than name, address, and email with the servicer or financial institution (§668.164(e)(2)(i) and (f)(4)(i)). [Discussion on pgs. 28503-28504]

Concern: How will a servicer be able to authenticate a student's identity in order to allow him or her to select a disbursement method if the school is not allowed to share any information that only the student would know? It is not clear if ED is imagining a two-step process where the institution or servicer first asks the student whether he would like to open an account or not and then, if the student says yes, the institution shares additional information necessary for the servicer to complete the process. However, even if the student does not assent to opening an account, the servicer still needs to be able to verify that the person directing it to deposit a credit balance refund in another bank account is actually the student. Often, the most challenging part of the process is getting students' attention and spurring them to make a choice about disbursement method. Additional steps and barriers will make it more difficult to get refunds to students in a timely manner.

End of Year Disclosure of Account Charges

NPRM would:

• For T1 and T2 arrangements, institutions would have to post on their websites and submit to ED, no later than 60 days after the end of an award year, contracts with servicers and financial institutions, any consideration received by all parties under the contract, the number of students and parents with accounts under the contract, and the median and mean of actual costs incurred by account holders. Institutions would also have to submit a URL to ED for inclusion in a national database. §668.164(e)(2)(v) and §668.164(f)(4)(iii) [Discussion on p. 28510]

Concern: There are a number of procedural hurdles that would make it difficult, if not impossible, for schools to comply with these data requirements. The first difficulty would be defining "financial accounts under the contract." Many T2 arrangements with financial institutions do not restrict individuals affiliated with the college or university to a particular type of account or even limit the arrangement to newly opened accounts. A student might arrive on campus with an existing account with the same financial institution and ask that it be linked to his or her ID card. While the school may have analyzed the terms of a bank's "student account" when choosing to enter into the agreement, it does not restrict the ability of students or parents to choose another option.

Second, in order to calculate the number of students and parents holding these accounts at any time during the year, as well as the median and mean of fees students pay annually, the financial institution would have to know which account holders were students. Directory information alone would not be enough to verify that an account holder was a student at the institution, absent some unique identifier such as a social security number that could be used to crosswalk the data (which neither party should share with the other.) Determining which accounts were held by parents borrowing PLUS loans (the definition ED provides for "parent" in these rules) would be even more challenging.

Restrictions on Certain Fees for T1 Accounts

NPRM would:

• Under 668.164(e)(2)(iii) and (iv), the school must ensure that the student/parent does not incur any cost, imposed by the school, its servicer, or the affiliated financial institution, for (1) point-of-sale fees; (2) in-network ATM transactions; (3) any charge for 30 days after a Title IV credit balance disbursement deposited in the account; and, (4) any transaction that exceeds the balance on the "card." [Discussion on pg. 28505-28509]

Concern: The biggest challenge with these proposed fee restrictions will be the 30-day fee-free period. As written, the provision is much broader than other parties recall discussing during negotiated rulemaking. A student could incur charges for wire transfers, nonsufficient funds, and more with impunity.

Third-Party Servicer and Location Definitions

NPRM would:

• Under 668.164(e)(1), rely on the determination of whether an entity is a servicer provides "one or more of the functions associated with processing direct payments" as a key component of the determination as to whether a T1 arrangement exists. [discussion on p. 28497 - 28500]
• Under 668.164(e)(2)(iii) and (f)(4)(v), the school would need to ensure that funds in a T1 or T2 financial account are accessible from in-network ATMs convenient to each of the institution's locations. [Discussion on p. 28507]

Concern: Neither third-party servicer nor location is defined as part of these regulations. ED appears to be in some flux regarding third-party servicers at the moment, raising the specter that it might consider routine banking activities (e.g., a school's bank that prints and mails all checks for the school) as making the bank a Title IV third-party servicer and thus moving an otherwise T2 arrangement into the T1 category. For instance, the 2014-15 Federal Student Assistance Handbook lists lockbox processing and performing EFTs as activities that would not make the entity a third-party servicer. Those exceptions were not mentioned in "Dear Colleague Letter" (GEN-15-01) issued in January of this year.

Similarly, what does ED mean by "location" in this instance—an eligible location at which the school offers more than 50 percent of a program? Colleges and universities bring classes to many locations including high schools, store fronts, and corporate headquarters. It would be quite challenging for a large university or community college to ensure ATMs at each and every location.

Due Diligence

NPRM would:

• Require schools to ensure that the terms of the financial accounts offered pursuant to T1 or T2 arrangements are "not inconsistent with the best financial interests of the students and parents opening them" (668.164(e)(2)(vii) and (f)(4)(vii)). This would include conducting periodic due diligence reviews. Schools would also be required to "take affirmative steps to ensure" that the regulatory requirements are met for all accounts offered under T1 or T2 arrangements. [Discussion on pgs. 28511-28512]

Concern: Conducting periodic reviews at an unspecified interval to compare account offerings to "prevailing market rates" is fraught with difficulties for colleges and universities and could be an expensive undertaking. Further, ED seems to be requiring schools to police bank behavior on an on-going basis on factors that schools would be ill-equipped to oversee.

FILING COMMENTS

NACUBO is preparing to file comments on behalf of its members, which may include additional analysis and critique beyond this list. Please share your thoughts, concerns, and relevant data with the staff members listed below (no later than June 22 in order to be most helpful). NACUBO also encourages members to share their own comments directly with ED by the July 2 deadline.