Tier One Arrangements

Under the final cash management rules, if a higher education institution has an agreement with a third-party servicer where the servicer "performs one or more of the functions associated with processing direct payments of Title IV funds on behalf of the institution" and offers one or more financial accounts under the arrangement, or markets an account to students itself or through another entity, the institution is considered to have a Tier One (T1) relationship.

Each of the T1 provisions is discussed in more detail below, with the regulatory citation and page numbers where ED's discussion of the topic in the preamble to the final rules can be found.

Unless otherwise noted, the provisions listed below are effective July 1, 2016.

Student Choice [§668.164(d)(4)] 

Institutions with a T1 arrangement must establish-or have their servicer establish-a selection process where students have several options for receiving their credit balance refunds. Institutions must:

• Inform students in writing that they are not required to open or obtain an account/access device offered through a specific financial institution.
• Present options for students in a clear, fact-based, and neutral manner.
• Prominently list a student's existing account as the first choice when describing the options for receiving credit balance refunds.
• Ensure that initiating payments to a student's existing account is as timely as and no more onerous to the student than issuing the payment to the T1 account.
• Allow a student to change his or her previously selected payment option as long as the student provides written notification within a reasonable time.
• Ensure no account option is preselected.
• Pay the full amount of a credit balance refund (likely by check) within the appropriate time period when a student does not make an affirmative selection for payment method. (pg. 67151)

Further, institutions must list the major features and commonly assessed fees associated with each account offered under the T1 arrangement, and also provide a URL for the terms and conditions of each account. Because ED is working in consultation with the Consumer Financial Protection Bureau to create a uniform disclosure template, this provision will not be effective until July 1, 2017.

Access Devices [§668.164(e)(2)(i)]

Institutions with T1 arrangements must ensure that a student's consent to open an account is obtained before an access device, such as a card, is sent to the student. Schools may send ID cards that can eventually function as an account access device to a student without obtaining his or her consent. The student will still have to provide consent, though, for the account functionality of the card to be activated. (pg. 67158)

Personally Identifiable Information [§668.164(e)(2)(ii)]

Before a student elects to receive his or her credit balance refund in an account offered under a T1 arrangement, there are limitations on what student information a college or university can share with the third-party servicer. The rules allow schools to share directory information, a unique student identifier (ID number), the disbursement amount, and a password, PIN, or other "shared secret." (pg. 67157)

The rules state that the information shared with a third-party servicer prior to a student selecting the account can only be used "for activities that support making direct payments of Title IV, HEA program funds and not for any other purpose." This presents a challenge for colleges and universities, as credit balance refunds may be comprised of Title IV and/or non-Title IV funds. NACUBO is seeking clarity from ED on its intentions. (pg. 67143)

Terms and Conditions of Financial Accounts [§668.164(e)(2)(iii)]

Institutions must inform students of the terms and conditions of accounts offered in a T1 arrangement, including major features and commonly assessed fees, before the account is opened. (pg. 67151)

Convenient Access to Funds and Extension of Credit [§668.164(e)(2)(iv) and (v)]

Students with accounts offered under a T1 arrangement must have convenient access to their funds - in part and in full up to the account balance - through a surcharge-free national or regional ATM network with a sufficient number of machines that are housed and serviced so funds are reasonably available to students, including when credit balance refunds are disbursed.  The basis of the limit on fees is the total Title IV dollars deposited into the account. Once a student has exhausted the amount of Title IV funds in the account, the fee-free access requirement no longer exists.

Students cannot be charged a fee for opening a T1 account or receiving an access device, making point-of-sale transactions, conducting a balance inquiry or a withdrawal of funds at an ATM within the surcharge-free network, or transferring funds during the student's entire period of enrollment following the date that Title IV funds were initially deposited. (pg. 67162)

ED maintains the current requirement that these accounts cannot be marketed as, portrayed as, or converted into credit cards. Additionally, T1 accounts cannot extend credit and cannot charge a fee for a transaction or withdrawal that exceeds the balance in the account (67147). ED allows for inadvertent overdrafts, as long as no fee is charged for the transaction. The most common example is a restaurant check when the total is less than the balance in the account, but the addition of a tip causes an overdraft. (pg. 67165)

Fees for insufficient funds are still allowed.

Disclosures [§668.164(e)(2)(vi)-(viii)]

Institutions must, no later than 60 days following the most recently completed award year, disclose on their website the contract establishing the T1 arrangement. Institutions are allowed to redact portions of the agreement that would compromise "personal privacy, proprietary information technology, or the security of information technology or of physical facilities." This provision is effective September 1, 2016. Institutions will also need to provide ED with the URL of the contract so the agency can include it in a centralized public database. (pg. 67168)

Additionally, institutions must post on their websites the total consideration for the most recently completed award year, monetary and non-monetary, paid or received by the parties under the terms of the contract. If students have opened 30 or more financial accounts in a year under the T1 arrangement, the institution must also list the number of students with those accounts during the most recently completed award year, as well as the mean and median costs incurred by the account holders. (pg. 67169)

Best Interests of Students and Compliance [§668.164(e)(2)(ix) and (x)]

Institutions must keep the best financial interests of students in mind when negotiating the terms of a T1 arrangement. ED requires institutions with these arrangements to conduct due diligence reviews at least every two years to review whether the fees are, "considered as a whole, consistent with or below prevailing market rates." Contracts for T1 arrangements must allow for the termination of the agreement by the institution based on complaints received from students or a determination by the school that the account fees are not consistent with or are higher than prevailing market rates.

Colleges and universities cannot simply rely on their servicers to comply with the rules, reflecting ED's concerns that in the past institutions have been too passive in in overseeing the actions of third-party servicers. Institutions are charged with taking affirmative steps, by way of contractual arrangements with the third-party servicer as necessary, to ensure the provisions of the regulations are met with respect to all accounts offered under the T1 arrangement. (pg. 67172)

Regulations Apply to Enrolled Students [§668.164(e)(3)

With the exception of the personally identifiable information section, the T1 regulatory requirements will not apply to an account holder if the student is no longer enrolled at the institution and there are no pending Title IV disbursements for him or her. This provision specifically allows institutions to share enrollment information with the servicer for this purpose, although it seems to limit it to Title IV recipients. NACUBO has raised concerns about non-Title IV recipients who may also choose the T1 account. (pg. 67143)