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May 17, 2016
Publications

by Nicole Stezar Kaylor

Final regulations promulgated last year by the United States Department of Education (the “Department”) become effective July 1, 2016. The Department stated that the purpose of the regulations is “to address recent changes in the higher education marketplace that have led to the proliferation of campus debit and prepaid cards offered to students in exchange for monetary benefits to schools.” The regulations will impose significant restrictions on a post-secondary institution’s relationship with a financial institution disbursing Title IV Higher Education Act program funds.

Two types of relationships between a post-secondary institution and a financial institution are established by the regulations: (i) tier one arrangements (“T1”); and (ii) tier 2 arrangements (“T2”). The Department defines a T1 arrangement as an arrangement between an institution and a third-party servicer under which the servicer (A) performs one or more of the functions associated with processing direct payments of Title IV funds on behalf of the institution, and (B) offers one or more financial accounts under the arrangement or directly markets the account to students itself or through an intermediary. T2 arrangements, on the other hand, are defined as arrangements 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.

The major provisions of the restrictions include:

1. Requiring institutions with T1 and T2 arrangements to have a student choice process that: (A) prohibits an institution from requiring students to open an account into which their credit balances must be deposited; (B) requires an institution to provide a list of account options from which a student may choose to receive credit balance funds electronically, where each option is presented in a neutral manner and the student’s preexisting bank account is listed as the first and most prominent option with no account preselected; and (C) ensures electronic payments made to a student’s preexisting account are initiated in a manner as timely as, and no more onerous than, payments made to an account made available pursuant to a T1 or T2 arrangement;
2. Restricting personally identifiable information that is shared with any financial account provider as a result of a T1 arrangement;
3. Requiring the institution to obtain a student’s consent to open an account under a T1 arrangement before sending an access device to the student or validating an access device that is also used for institutional purposes, enabling the student to use the devise to access a financial account;
4. Mitigating fees incurred by students by providing access to surcharge-free automated teller machines and for T1 arrangements prohibiting point of sale and overdraft fees;
5. Requiring contracts governing T1 and T2 arrangements to be conspicuously and publically disclosed;
6. Requiring cost information related to T2 arrangements to be conspicuously and publically disclosed; and
7. Requiring institutions that have T1 arrangements to establish and evaluate the contracts governing those arrangements in light of the best financial interests of students.

The Cash Management regulations will not only pose new restrictions on post-secondary institutions but may also impact current agreements institutions have in place with financial institutions.