The Education Department’s Debit Card Pilot Could Threaten Student Aid

An ATM machine is viewed in New York, May 2013.

As Education Secretary Betsy DeVos spoke to about 6,000 financial aid administrators from colleges across the country last week, she placed some blame for ballooning loan balances on students. In her remarks to the Office of Federal Student Aid’s (FSA) Training Conference, she noted that, “Students—our human capital—must equip themselves to be responsible consumers of education with a serious commitment to their own success. They need to have the best possible tools, data, advice, and support. And then they need to understand the implications of their decisions.”

Diane Auer Jones, another Education Department (ED) official speaking at the conference, elaborated on DeVos’ comments, saying that ED must take ownership of “raising borrowers who are responsible for the decisions they make, and accountable for what they choose to do.” She also stated that repayment plans that allow borrowers to repay their loans based on their incomes were not created as “a rescue for every student who wants to lead a certain lifestyle.”

Such stereotypes have become the avocado toast of the higher education set: If only students would stop using financial aid money for silly expenses such as tattoos and spring break trips, they wouldn’t have so much debt. Conservatives, loan servicers, and schools have engaged in this rhetoric for years, and it unfairly blames students for being in debt. Research has shown that although U.S. students receive more than $120 billion in federal aid every year, half of students are food and/or housing insecure. And of U.S. students who drop out of college, half cite cost as one of the reasons they left school. Yet recent work has shown that students who are offered loans have better completion outcomes and that noncompletion, rather than loan balance, is most closely associated with repayment struggles.

In spite of evidence that overborrowing isn’t the problem with the aid system, FSA is determined to learn more about students’ spending habits by building a campus debit card pilot program. Participants in the pilot program will be selected at the end of December, and the pilot is tentatively scheduled to conclude in December 2020. The pilot will offer all federal grant and loan recipients at participating schools a debit card that is co-branded by FSA and a private financial institution, which would levy absolutely no fees on students who use it.

But the pilot comes with big caveats. First, it will allow FSA’s chosen financial institution to market products to students who participate. Should the pilot be expanded to all schools and students, the financial institution will have marketing access to potentially millions of student aid recipients. Second, FSA would receive reports on student spending from the financial institution—reports with information that it could twist into a justification to reduce access to or funding for federal aid programs.

A new way to receive aid—and ads

One year ago, FSA announced its plan to pilot what it calls a “payment vehicle account”—essentially a debit card. As stated above, the card will be co-branded by FSA and a financial institution and will offer a fee-free account for students. In the past, campus debit cards and banks have charged students downright ridiculous fees for everything from overdrafts to swiping their cards. The FSA card will instead provide a free product for students and colleges to use.

The catch? As DeVos said in her opening remarks to the FSA Training Conference, “[N]othing is free. Someone, somewhere ultimately pays the bills.” And FSA made clear in its initial proposal for the card that whatever financial institution receives the contract will have the opportunity “to build a stronger, lifetime relationship with FSA’s Customers.” So in return for a financial institution fronting money for the pilot, it gets lifetime access to more than 13 million potential customers every year.

This population is a gold mine for a bank, which could spend decades marketing credit cards, mortgages, and other products to students who sign up. FSA makes clear in its proposal that students would have to opt in to discrete marketing communications, and research has demonstrated that opt-in programs receive much less enrollment that do opt-out ones. But even if only 10 percent of students opt in, a financial institution that is implicitly endorsed by FSA would have marketing access to more than 1 million people, and this number would likely grow every year as new students enrolled in college.

An excuse to limit aid

What does FSA stand to gain from partnering with a financial institution? Here’s where the overborrowing rhetoric comes in. FSA has innumerable pieces of information on student loan repayment, but it has next to no idea how students are spending their aid dollars. The payment card pilot will allow it to get those data.

In the proposal, FSA would receive aggregated data on student spending from the financial institution. While FSA states that it will not receive information on individual students or on items purchased, it will be able to see what kinds of merchants students are shopping at via merchant category codes (MCCs). There are hundreds of MCCs that card companies use to categorize businesses, from code 8220—Colleges, Universities, Professional Schools, and Junior Colleges—to code 7996—Amusement Parks, Circuses, Carnivals, and Fortune Tellers.

Some federal programs that already use campus debit cards to disburse funds restrict where beneficiaries can spend their allocations. For example, Temporary Assistance for Needy Families (TANF) funds cannot be used at liquor stores, casinos, and adult entertainment establishments. Federal grants and loans are similarly restricted, but to the much more vague “education-related expenses,” a broad category which includes living costs. So is a haircut covered? What about a flight across the country to do an internship or visit family? What about a home health aide for an aging parent?

FSA says it wants spending data for the “monitoring of compliance,” which could be read as code for compliance with the education-related expenses clause of the Higher Education Act. But regardless of the compliance to which FSA is referring, access to these data is a slippery slope. Should the Education Department get data it doesn’t like, it could choose to restrict federal student aid spending to only certain MCCs, limiting what kinds of goods and services students can access.

With the overborrowing narrative that officials are pushing, it’s difficult to imagine a world where this isn’t on the table. In the best-case scenario, FSA would prevent spending at certain types of vendors. At worst, the payment card pilot could provide data that FSA could manipulate into ammunition to cut back on student aid spending and allow colleges to restrict aid to certain groups of students. Since colleges are on the hook for borrowers who default, some open-access institutions have been lobbying for quite some time to restrict certain students from borrowing. They typically want to prevent borrowing by students who are more likely to default, a category which includes adult students, students of color, and those from low-income backgrounds. These policies could discourage students from enrolling or staying enrolled, effectively cutting off access to higher education for some of the most vulnerable populations.

What can FSA do to fix the payment card pilot?

The pilot isn’t without utility. FSA is explicit about the card not charging any fees to students, something that is rare in the debit card world. Colleges without the resources to offer their own campus debit cards could also save money by streamlining the aid distribution process. But the problem all along has been that the program is a solution in search of a problem.

If FSA wanted to end a good amount of the rancor around the payment card, it could explicitly state in an amendment to the solicitation that it will not receive any aggregated transaction data from the financial institution administering the card, including Merchant Category Codes. It could also restrict the length of time that students may hold the FSA card account, so that students are not holding the card for the rest of their lives.

And Congress must consider how to ensure that FSA is acting as a good steward for students. Current laws prevent colleges from sharing the personally identifiable Free Application for Federal Student Aid (FAFSA) and other aid information of students without their explicit consent, including for marketing purposes, but it is unclear how these laws apply to the payment card pilot. Congress should look into what consumer protections will apply to the payment card and get answers from FSA as to why it is implementing the pilot in the first place.

Until FSA’s motives are made clear and safeguards are put into place, advocates will continue to push back on the payment card. Without diligence on this issue, the overborrowing narrative will not just continue—it will be buoyed, regardless of how students are spending their money.

Colleen Campbell is an associate director for Postsecondary Education at the Center for American Progress.