The good news is, there’s no credit check needed for this debit card.
That’s because a soon-to-be-launched prepaid student loan system by the government—more specifically, The Office of Federal Student Aid, which is part of the U.S. Department of Education—can see how, where, when, and why students spend that money and collect data about their spending habits along the way.
Right now, 43 million students in the U.S. are borrowing money for college.
As part of a pilot program that will be rolled out to 100,000 college students, the Federal Student Aid (FSA) Payment Card will allow the Dept. of Ed to track how students spend financial aid loan money.
The students selected can either opt to use the corporation-sponsored card or not. Via text, it will also alert users when they are reaching a certain budget limit on their spending for things like food, housing, transportation, and other college-life necessities.
Although the tracking functionalities are there, A. Wayne Johnson, who leads a Strategy and Transformation unit at the FSA, says they don’t plan to particularly *restrict* any spending. “FSA does not currently envision restrictions being placed on the use of funds,” he says, as reported by Inside Higher Ed. (We’ll have to wait and see, because draft documentation of its functionality does include a way to do just that.)
Essentially, it means the government can be half-monitoring, half-loaning-and-sponsoring the everyday purchases of a college student, though you could argue that they’re half-parenting, too. That’s at least one too many halves.
An alert that you’re reaching your monthly spending limit on food might be helpful, but a text asking a student whether they really need a giant neon beer logo sign for their room could cross the line between helpful data analysis and personal freedom.
These student loan debit cards could be a game-changer in a good way.
Right now, college aid is applied to college tuition directly through the financial institution. Once tuition is covered, any unused funds go to the student in the form of a check or direct deposit.
Ideally, that money is used for books, food, rent, and so forth. Knowing that the money is on prepaid student loan debit cards and that the “government” is watching—along with their parents, who can also load money into the account—might help college students make better, more responsible choices when it comes to how they spend their student loan money.
But there are some red flags.
Because students in need may already find themselves paying off borrowed loans, whether personal or at the state or federal level in order to put themselves through higher education and simply survive, this card could potentially leave students and taxpayers open to exploitation.
That’s how U.S. Senators like Elizabeth Warren and Dick Durbin feel, which they expressed in a letter to Wayne Johnson, CEO of the U.S. Department of Education.
“In a 2012 report, the U.S. Public Interest Research Group revealed that financial institutions issuing prepaid or debit cards to college students were using a host of exploitative fees and practices,” they wrote.
Historically, card companies have thrown some hidden fees at college students that dig them into a pretty deep hole, such as extra charges on late payments or borrowing more than the allotted limit. And according to the New York Times, banks would process the largest charges first, then charges fees on the others, so that they make money on going over the limit rather than not allowing these larger transactions to happen in the first place, in addition to the fees they know about.
This might include a “non refundable convenience fee” that can be as high as 2.99 percent, which is the case at Western Kentucky University, St. Joseph’s University in Philadelphia, and Roger Williams University in Rhode Island. Although the average convenience fee falls at around 2.62 percent, that’s still pretty steep.
This led the Obama administration to crack down on what card companies could and couldn’t do when it came to best practices.
The test group number is small potatoes in comparison to the grand total of $1.3 trillion floating around in the giant, bottomless ocean of student loans.
While positive changes undoubtedly need to be made when it comes to student loan money distribution, the jury is still out on whether or not these cards could help streamline the process or use the data they find to make improvements. Ideally, those responsible for distributing and managing the cards and the accounts will be going through proper channels, like the Consumer Financial Protection Bureau.
Greater transparency is clearly needed all around when it comes to financial aid and higher education, and this program should be no exception.
If this student loan debit cards program is successful, it will be another huge step forward in helping streamline, simplify, and organize a federal financial aid system that’s in need of a serious credit check of its own.