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Ready for Refund Reform?

The Department of Education (ED) has published an amended Cash Management Rule to guide how colleges and universities disburse Title IV credit balances.

Refund Reform


Solving the Student Refund Puzzle

The Department of Education (ED) has published an amended Cash Management Rule to guide how colleges and universities disburse Title IV credit balances. For some institutions, there is a lot to be done to meet published deadlines that range from July 2016 to September 2017. If you're confused, concerned, or just want clarity about what your campus should be doing now, click the links below to see a recording of our special TouchNet LIVE! presentation, Solving the Student Refund Puzzle, and a handout from the live streaming event.


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Compilation of Key Changes to the New Rule

Note: This content was created by TouchNet Information Systems, Inc. and is composed, in part, of excerpts from the Department of Education’s Final Ruling (Department of Education 34 CFR Part 668 - Program Integrity and Improvement; Final Rule) published in the Federal Register. The purpose of this content is to offer a condensed introduction to changes in requirements concerning disbursement of federal financial aid credit balances. The reader is encouraged to review the rule in its entirety as found in the Federal Register.

Purpose of This Regulatory Action:

Over the past decade, the student financial products marketplace has shifted, and the budgets of postsecondary institutions have become increasingly strained, in part due to declining State funding. These changes have coincided with a proliferation of agreements between postsecondary institutions and financial account providers. Cards offered pursuant to these arrangements, usually in the form of debit or prepaid cards and sometimes cobranded with the institution's logo or combined with student IDs, are marketed to students as a way to receive their title IV credit balances. However, a number of reports from government and consumer groups document troubling practices employed by some financial account providers. Legal actions, especially those initiated by the Federal Reserve and Federal Deposit Insurance Corporation (FDIC), against the sector's largest provider reinforce some of these concerns.

According to these reports, many of the following practices were found:

  • • Providers prioritizing disbursements to their own affiliated accounts over aid recipients' preexisting bank accounts.

  • • Providers and schools strongly implying to students that signing up for the college card account was required to receive Federal student aid.

  • • Private student information unrelated to the financial aid process being given to providers before aid recipients consented to opening accounts.

  • • Access to the funds on the college card was not always convenient; and

  • • Aid recipients being charged onerous, confusing, or unavoidable fees in order to access their student aid funds or to otherwise use the account.

These practices indicate that many institutions have shifted costs of administering the title IV student aid programs to students. Given that approximately nine million students attend schools with these agreements, that approximately $25 billion dollars in Pell Grant and Direct Loan program funds are disbursed to undergraduates at these institutions, that students are a captive audience subject to marketing from their institution, that the college card market is expanding, and given the concerns raised by existing practices, the Department of Education believed regulatory action governing the disbursement of title IV, student aid was warranted.

Summary of the Major Provisions:

  • • Established definitions for two different types of arrangements between institutions and financial account providers, “tier one (T1) arrangement” and “tier two (T2) arrangement,” respectively.

  • • A tier one (T1) arrangement is between an institution and a third-party servicer that performs one or more of the functions associated with processing direct payments of title IV funds on behalf of the institution and that offers one or more financial accounts to students and parents.

  • • A tier two (T2) arrangement is between an institution and a financial institution or entity that offers financial accounts through a financial institution under which financial accounts are offered and marketed directly to students or their parents. There are now two subsets of a T2 dependent on threshold of students with credit balances:

  • LOWER THRESHOLD (T2 Low)

    • If the school has at least one student with a Title IV credit balance in each of the three most recently completed award years but fewer than the 500 students or 5 percent of enrolled students, the relationship is defined as lower threshold.

  • HIGHER THRESHOLD (T2)

    • If the school has an average of 500 or more students, or an average of 5 percent or more of enrolled students, with Title IV credit balances for the three most recently completed award years, the relationship is defined as higher threshold.

  • • Require institutions that have T1 or T2 arrangements to establish a student choice process that: Prohibits an institution from requiring students or parents to open an account into which their credit balances must be deposited; requires an institution to provide a list of account options that a student may choose from to receive credit balance funds, where each option is presented in a clear, fact-based and neutral manner and the student's preexisting bank account is listed as the first choice, and ensures electronic payments made to a student's preexisting account are as timely as, and no more onerous, as payments deposited to an account made available pursuant to a T1 or T2 arrangement.

  • • Require that the institution obtain consent from the student or parent to open an account under a T1 or T2 arrangement (1) limiting the type of personally identifiable information (PII) to directory information that the school can send to the financial account provider, and (2) before the institution or account provider sends an access device to the student or parent or links the student's ID card with a financial account.

  • • Mitigate fees incurred by student aid recipients by requiring reasonable access to surcharge-free automated teller machines (ATMs), and, for accounts offered under a T1 arrangement, both prohibiting point-of-sale fees and overdraft fees charged to student and parent account holders.

  • • Require that contracts governing T1 or T2 arrangements and cost information related to those contracts are publicly disclosed; and

  • • Require that institutions that have T1 or T2 arrangements establish and evaluate the contracts governing those arrangements in light of the best financial interests of students.

  • • Explicitly reserve the right for the Secretary to establish a method for directly paying credit balances to student aid recipients.

Overview of Requirements for New Financial Accounts:

Marketing

T1

T2

T2 (low)

Must consent to open before sending card or access device, except student ID card

X

X

X

No PII except directory info, unique ID, amount, & shared secret identifier

X

 

 

No PII other than directory without consent

 

X

X

Inform students of T’s and C’s before opening

X

X

X

Cannot be converted to credit card

X

X

X

Fees

T1

T2

T2 (low)

No cost to open new financial account

X

X

X

No point-of-sale fees

X

 

 

No overdraft fees or credit extended

X

 

 

Withdrawals

T1

T2

T2 (low)

Minimum of one way to withdraw or transfer 100% of credit balance funds without charge for as long as student is enrolled

X

 

 

ATM Access

T1

T2

T2 (low)

Convenient access to ATM reasonably available to students, including peak times

X

X

 

Surcharge-free national or regional network

X

X

 

No charge for in-network fund withdrawals or balance inquiries

X

X

 

Disclosure

T1

T2

T2 (low)

September 2016 - Disclose contracts on institution’s website and provide ED with URL for publication

X

X

X

July 2017 - Account fee disclosure in new CFPB-driven format

X

X

X

September 2017 - List considerations paid or received by parties under the contract and provide mean and median of actual costs incurred (› 30 financial accounts)

X

X

 

Due Diligence

T1

T2

T2 (low)

Terms of accounts in best interest of students and reasonable due diligence every 2 years

X

X

 

Contracts terms must allow termination for too many complaints or fees higher than prevailing marketing rates

X

X

 

Ensure requirements are being met for T1 and T2 arrangements

X

X

X

 

Refund Reminder #7:

In less than two months, the new Cash Management Rule from the Department of Education (ED) will become effective. It defines requirements for colleges and universities and their financial service providers that disburse financial aid to students. These include rules about student choice, disclosures, ATM access, account fees, information privacy, and much more for those institutions whose disbursement processes include the use of T1 or T2 financial accounts.

The overarching theme of the new Rule is that colleges and universities must remain involved and active in the oversight of refund programs to ensure that all services and products are not inconsistent with the best financial interests of the student. For example, institutions must ensure:

  • Student information is kept private and not shared without the student’s permission;
  • Student’s consent to open the financial account is obtained before an access device, such as a debit card, is sent to the student;
  • Direct-to-student marketing is not predatory or misleading;
  • Account fees imposed are, considered as a whole, consistent with or below prevailing market rates;
  • Students’ options for receiving direct payments are described and presented in a clear, fact-based, and neutral manner;
  • Students have access to disbursed funds via Automated Teller Machines (ATMs) sufficient in number to be reasonably available to students.

Most of the new rule is focused on institutions that offer T1 or T2 financial accounts to their students. If your institution disburses refunds using only direct deposit to existing students’ bank accounts or paper checks, then the new rule will have a limited impact on your campus.

This and previous TouchNet Refund Rule Reminders highlight some of the key changes coming this July. But no series of reminders can substitute for reading the new rule directly. So, urging campuses to know and understand the contents of ED’s new rule could be the best reminder of all.

Refund Reminder #6:

Beginning July 1, 2016, financial accounts offered to students and used for financial aid disbursements (both T1 and T2) must be “not inconsistent with the best financial interests of those students opening them.” In fact, institutions must conduct due diligence reviews at least every two years in order to substantiate that these financial accounts, offered via service providers and financial institutions, comply with the Department of Education’s (ED) new Cash Management rule. For example, these accounts must offer competitive fees which are “considered as a whole, consistent with or below prevailing market rates.”

One of the key factors behind the creation of a new rule was a report by ED’s own Office of Inspector General stating that institutions had become too lax in the oversight of their financial partners. ED believes that when colleges and universities become compliant with all the elements of the new Cash Management rule, where and when applicable (see Refund Reminder #4), these perceived issues will be corrected. As you prepare for the rule’s July 1st effective date and if due diligence findings indicate that any current financial account provider’s products are not in the best financial interests of your students, you may be able to terminate offending contracts and improve your compliance.

Here are excerpts from the Cash Management rule published October 29, 2015:

§ 668.164(e)   Tier one arrangement.

(2) Under a T1 arrangement, the institution must—

(ix) Ensure that the terms of the accounts offered pursuant to a T1 arrangement are not inconsistent with the best financial interests of the students opening them. The Secretary considers this requirement to be met if—

(A) The institution documents that it conducts reasonable due diligence reviews at least every two years to ascertain whether the fees imposed under the T1 arrangement are, considered as a whole, consistent with or below prevailing market rates;

§ 668.164(f)   Tier two arrangement.

(4) Under a T2 arrangement, the institution must—

(viii) Ensure that the terms of the accounts offered pursuant to a T2 arrangement are not inconsistent with the best financial interests of the students opening them. The Secretary considers this requirement to be met if—

(A) The institution documents that it conducts reasonable due diligence reviews at least every two years to ascertain whether the fees imposed under the T2 arrangement are, considered as a whole, consistent with or below prevailing market rates;

Refund Reminder #5:

Institutions must be proactive ensuring that financial accounts marketed to their students and any associated fees are in their students’ best interest. Colleges and universities are responsible for making sure that account fees are clear, consistent with or below market rates, competitive, and compliant with the Department of Education’s (ED) new Cash Management rule, effective July 1, 2016. Certain fees are prohibited: (i) fees to open an account or receive an access device (i.e., debit card); (ii) fees for point-of-sale transactions; and, (iii) fees for balance inquiries or withdrawals of funds at an ATM. In addition, commonly assessed fees associated with each financial account must be made available on the student choice menu.

Excerpts from Cash Management rule published October 29, 2015:

§ 668.164(d)   Direct payments.

(4) Student choice.

(i) An institution … must establish a selection process under which the student chooses one of several options for receiving payments.

(B) In describing the options under its selection process, the institution—

(2) Must list and identify the major features and commonly assessed fees associated with each financial account offered under the arrangements described in paragraphs (e) and (f) of this section, as well as a URL for the terms and conditions of each account.

§ 668.164(e)   Tier one arrangement.

(2) Under a T1 arrangement, the institution must—

(vi) Ensure that the student—

(B) Does not incur any cost—

(1) For opening the financial account or initially receiving an access device;

(2) Assessed by the institution, third-party servicer, or a financial institution associated with the third-party servicer, when the student conducts point-of-sale transactions in a State; and

(3) For conducting a balance inquiry or withdrawal of funds at an ATM in a State that belongs to the surcharge-free regional or national network.

(ix) Ensure that the terms of the accounts offered pursuant to a T1 arrangement are not inconsistent with the best financial interests of the students opening them. The Secretary considers this requirement to be met if—

(A) The institution documents that it conducts reasonable due diligence reviews at least every two years to ascertain whether the fees imposed under the T1 arrangement are, considered as a whole, consistent with or below prevailing market rates...

§ 668.164(f)   Tier two arrangement.

(4) Under a T2 arrangement, the institution must—

(viii) Ensure that the terms of the accounts offered pursuant to a T2 arrangement are not inconsistent with the best financial interests of the students opening them. The Secretary considers this requirement to be met if—

(A) The institution documents that it conducts reasonable due diligence reviews at least every two years to ascertain whether the fees imposed under the T2 arrangement are, considered as a whole, consistent with or below prevailing market rates; and

(x) Ensure students incur no cost for opening the account or initially receiving or validating an access device.

Refund Reminder #4:

The new Cash Management rule from the Department of Education (ED) requires disclosure by institutions with Tier 1 or Tier 2 relationships of certain key information about the financial accounts offered to their students. Here is a timeline of when these disclosures must begin:

July 1, 2016 (rule effective date)

  • • Disclose via the student choice menu the major features and commonly assessed fees associated with each T1 or T2 financial account option;
  • • Provide students with a URL link to the terms and conditions of each T1 or T2 financial account;

September 1, 2016

  • • Disclose the contract(s) that define T1 and T2 relationships conspicuously on the institution’s web site;
  • • Provide to the Secretary an up to-date URL for these contracts for publication in a centralized database accessible to the public;

July 1, 2017

  • • Disclose the major features and commonly assessed fees associated with T1 and T2 financial accounts using the format, content, and update requirements specified by the Secretary in the Federal Register;

September 1, 2017

  • • Disclose conspicuously on the institution’s web site, in a format established by the Secretary, the total consideration for the most recently completed award year paid or received by the parties under the terms of T1 or T2 contracts;
  • • Disclose the number of students who had financial accounts under the contracts at any time during the most recently completed award year and the mean and median of the actual costs incurred by those account holders.

Excerpts from Cash Management rule published October 29, 2015:

§ 668.164(d)   Direct payments.

(1) Student choice.

(i) An institution located in a State that makes direct payments to a student by EFT and that enters into an arrangement described in paragraph (e) or

(f) of this section, including an institution that uses a third-party servicer to make those payments, must establish a selection process under which the student chooses one of several options for receiving those payments.

(B) In describing the options under its selection process, the institution—

(2) Must list and identify the major features and commonly assessed fees associated with each financial account offered under the arrangements described in paragraphs (e) and (f) of this section, as well as a URL for the terms and conditions of each account. For each account, if an institution by July 1, 2017 follows the format, content, and update requirements specified by the Secretary in a notice published in the Federal Register following consultation with the Bureau of Consumer Financial Protection, it will be in compliance with the requirements of this paragraph with respect to the major features and assessed fees associated with the account;

§ 668.164(e)   Tier one arrangement.

(2) Under a T1 arrangement, the institution must—

(vi) No later than September 1, 2016, and then no later than 60 days following the most recently completed award year thereafter, disclose conspicuously on the institution’s Web site the contract(s) establishing the T1 arrangement between the institution and third-party servicer or financial institution acting on behalf of the third-party servicer, as applicable, except for any portions that, if disclosed, would compromise personal privacy, proprietary information technology, or the security of information technology or of physical facilities;

(vii) No later than September 1, 2017, and then no later than 60 days following the most recently completed award year thereafter, disclose conspicuously on the institution’s Web site and in a format established by the Secretary—

(A) 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; and

(B) For any year in which the institution’s enrolled students open 30 or more financial accounts under the T1 arrangement, the number of students who had financial accounts under the contract at any time during the most recently completed award year, and the mean and median of the actual costs incurred by those account holders;

(viii) Provide to the Secretary an up to-date URL for the contract for publication in a centralized database accessible to the public;

§ 668.164(f)   Tier two arrangement.

(4) Under a T2 arrangement, the institution must—

(iii) No later than September 1, 2016, and then no later than 60 days following the most recently completed award year thereafter—

(A) Disclose conspicuously on the institution’s Web site the contract(s) establishing the T2 arrangement between the institution and financial institution in its entirety, except for any portions that, if disclosed, would compromise personal privacy, proprietary information technology, or the security of information technology or of physical facilities; and

(B) Provide to the Secretary an up-to-date URL for the contract for publication in a centralized database accessible to the public;

(iv) No later than September 1, 2017, and then no later than 60 days following the most recently completed award year thereafter, disclose conspicuously on the institution’s Web site and in a format established by the Secretary—

(A) 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; and

(B) For any year in which the institution’s enrolled students open 30 or more financial accounts marketed under the T2 arrangement, the number of students who had financial accounts under the contract at any time during the most recently completed award year, and the mean and median of the actual costs incurred by those account holders;

(v) Ensure that the items under paragraph (f)(4)(iv) of this section are posted at the URL that is sent to the Secretary under paragraph (f)(4)(iii)(B) of this section for publication in a centralized database accessible to the public.

Refund Reminder #3:

July 1, 2016 is the deadline for determining if your campus has any T1 or T2 relationships and implementing the new rules that pertain to offering students a financial account. Most campuses know their T1 relationships. Identifying T2 relationships can be a bit harder, but just as necessary. A T2 relationship is created when any financial institution directly markets new financial accounts to students enrolled at a college or university.

Even though these bank accounts initially may have had nothing to do with refunds of financial aid credit balances, their mere existence makes them a viable target for refund deposits according to the Department of Education. So, it is necessary to search for such agreements (perhaps made years ago or by ancillary departments) across campus in order to determine if they define T1 or T2 relationships. Both types of financial account agreements create special responsibilities for campuses, including compliance with new requirements for student choice, fee disclosure, ATM access, student privacy, transparency of contract terms, and other restrictions.

§ 668.164(f)   Tier two arrangement.

(1) In a Tier two (T2) arrangement, an institution located in a State has a contract with a financial institution, or entity that offers financial accounts through a financial institution, under which financial accounts are offered and marketed directly to students enrolled at the institution.

(3) The Secretary considers that a financial account is marketed directly if—

(i) The institution communicates information directly to its students about the financial account and how it may be opened;

(ii) The financial account or access device is cobranded with the institution’s name, logo, mascot, or other affiliation and is marketed principally to students at the institution; or

(iii) A card or tool that is provided to the student for institutional purposes, such as a student ID card, is validated, enabling the student to use the device to access a financial account.

Refund Reminder #2:

If your institution offers students the choice of receiving refunds via a debit card account, you must ensure that student accountholders have convenient access to Automated Teller Machine (ATM) machines. For T1 arrangements, financial accounts must belong to a surcharge-free national or regional ATM networks. If you have T2 relationships, you must ensure that the student accountholders can access their financial accounts through surcharge-free, in-network ATMs. In both cases, ATMs must be of sufficient number and housed and serviced such that title IV funds are reasonably available to students, especially at times when direct payments are made to students.

§ 668.164(e)(2)   Under a T1 arrangement, the institution must—

(iv) Ensure that the student—

(A) Has convenient access to the funds in the financial account through a surcharge-free national or regional Automated Teller Machine (ATM) network that has ATMs sufficient in number and housed and serviced such that title IV funds are reasonably available to students, including at the times the institution or its third-party servicer makes direct payments into the financial accounts of those students;

§ 668.164(f)(4)    Under a T2 arrangement, the institution must—

(vi) If the institution is located in a State, ensure that the student accountholder can execute balance inquiries and access funds deposited in the financial accounts through surcharge-free in-network ATMs sufficient in number and housed and serviced such that he funds are reasonably available to the accountholder, including at the times the institution or its third-party servicer makes direct payments into them;

Refund Reminder #1:

Schools and their financial account servicers can no longer mail refund cards to students without the students’ prior consent. The Department of Education’s new Cash Management Rule (subpart K) prohibits mass mailing of refund debit cards (or any other access device) associated with new financial accounts to students without the students’ approval, except for ID cards which carry their own requirements for acting as a refund method. This is true for financial account servicers defined as either a Tier 1 or Tier 2 relationship.

§ 668.164(e)(2)   Under a T1 arrangement, the institution must—

(i) Ensure that the student’s consent to open the financial account is obtained before an access device, or any representation of an access device, is sent to the student, except that an institution may send the student an access device that is a card provided to the student for institutional purposes, such as a student ID card, so long as the institution or financial institution obtains the student’s consent before validating the device to enable the student to access the financial account;

§ 668.164(f)(4)    Under a T2 arrangement, the institution must—

(i) Ensure that the student’s consent to open the financial account has been obtained before—

(B) An access device, or any representation of an access device, is sent to the student, except that an institution may send the student an access device that is a card provided to the student for institutional purposes, such as a student ID card, so long as the institution or financial institution obtains the student’s consent before validating the device to enable the student to access the financial account;

The Department of Education’s new Cash Management Rule adds new requirements to the process of disbursing financial aid credit balances. The new student refund restrictions go into effect July 1, 2016. They’re complicated and confusing, and Refund Reform is only one of several major changes to rules and regulations that should be “on the radar” of campuses everywhere. Get your copy of our new Campus Commerce RADAR Book for an in-depth discussion of the background and details of some of these key pressure points, including ED’s Refund Reform.

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