Critical New Protections for Students, Borrowers, and Taxpayers

By Under Secretary Ted Mitchell

Protecting students and borrowers has been central to President Obama’s higher education agenda and initiatives since day one. From holding career training programs accountable, ensuring they provide valuable education without drowning students in debt, to ending huge subsidies to banks and reinvesting that money for students, especially the neediest students who rely on Pell Grants — this Administration has made student, borrower, and taxpayer protection a top priority. Today we are announcing the publication of two sets of final regulations that build on these efforts to provide important new protections for students and taxpayers’ investment in higher education.

Over the past several years, partnerships between banks and colleges have led schools to market debit and prepaid cards to students, often giving students the impression that their school is endorsing that financial product. Students are likely to trust this endorsement, making them a particularly vulnerable population. These cards are marketed as a way for students to receive their Federal student aid meant to pay for books, rent, and other necessities. Government reports and investigations by consumer groups found that in some cases, students were either strongly urged or given no choice but to sign up for these accounts as a way to receive their financial aid.

The problem with some of these school-bank partnerships is that students who want to use the bank accounts they had before arriving on campus may be forced to take extra steps and experience delays to have the aid disbursed. In some cases, students were required to mail or fax in paper forms or to wait weeks for their refunds. But the bigger problem is that many of these school-endorsed accounts include fees that aren’t clearly disclosed to the student — like overdraft fees or fees for every debit purchase using a PIN — or schools only make funds accessible through a single fee-free ATM meant to serve thousands of students. These fees can add up and be burdensome, especially for college students trying to make ends meet.

It is critically important to ensure that students can choose freely how to receive their federal student aid refunds. Students need objective, neutral information about their account options; and they should be able to choose to receive deposits to their own bank accounts, rather than being forced to sign up for campus cards with unreasonable fees and obscure account terms. The new regulations ensure that these goals will be met, and students will have the protections they are entitled to.

The final regulations we’re announcing today will protect students against onerous fees, require schools to provide students with the ability to easily access their aid for free, and require schools to disclose the terms of their partnerships with financial institutions.

Today also marks another important milestone in an effort called for by the President in June 2014 to allow five million more student borrowers in the Direct Loan program to cap their student loan payments at 10 percent of their monthly income without regard to when they borrowed their loans. The final rule establishes a new income-driven repayment plan — called the Revised Pay As You Earn (REPAYE) Repayment Plan. In addition to the monthly payment cap, REPAYE will forgive remaining debt after twenty years for those who only borrowed for undergraduate study and twenty-five years for those who borrowed for graduate study. The REPAYE plan will also provide a new interest subsidy benefit to prevent ballooning loan balances for those whose income-driven payments cannot keep up with accruing interest.

The new repayment plan will be available to borrowers starting in December of this year.