College Students, Borrowers Win As Education Department Expands Protections

Two new rules finalized on Tuesday reflect an Obama administration trying to reduce the cost of college.

College students will be shielded from some fees when accessing federal student aid funds, while borrowers with older student loans will be eligible for slightly more generous repayment plans under new rules the U.S. Department of Education finalized Tuesday.

The rule governing banking products on college campuses sought to reverse what consumer advocates have decried as the increasing monetization of the federal student aid disbursement system, in which banks and other financial services firms teamed up with colleges to levy fees on students wishing to access their federal student loans and grants. Students are supposed to be able to receive their loans and grants without having to cough up money for the privilege.

The Education Department is now forcing colleges to restrict or ban certain fees, such as overdraft charges on some accounts. The federal Consumer Financial Protection Bureau is weighing new rules governing overdraft fees in the wider U.S. banking system.

The repayment rule enables borrowers with older loans to save a bit more money on their monthly federal student loan payments, reducing for some the required monthly payment from 15 percent of their discretionary income to 10 percent, with the possibility of loan forgiveness after 20 or 25 years of steady payments. The Education Department reckons the rule helps 5 million borrowers previously ineligible to cap their payments at 10 percent of their discretionary earnings; about 1 million existing borrowers, and another 1 million future borrowers, are projected to enroll.

Taken together, the two proposals represent an effort by the Obama administration to ease the cost of going to college. They come as Education Secretary Arne Duncan prepares to leave the department after presiding over a near doubling of federal student debt, and as consumer groups increasingly complain of a department that in many cases has not properly policed the colleges and financial companies making money off student aid recipients.

With 6.9 million borrowers in default on $111.4 billion in federal student debt, and millions more either delinquent or struggling to stay current, the Education Department has struggled to ensure that former students aren't overly burdened by student debt in an era of stagnating wages and lackluster economic growth. About 41 million Americans have federal student loans.

But the department also has struggled to properly protect current students from being gouged by hidden fees or otherwise steered into bank accounts promoted by their colleges in exclusive partnerships with financial institutions.

A 2012 report by the U.S. Public Interest Research Group, which largely launched the debate about campus banking products, found that colleges had generated revenue by striking deals with financial firms or had otherwise cut costs by outsourcing much of their federal student aid disbursement to outside companies, leading students to effectively pay for the right to access their federal student loans and grants in seeming violation of federal rules that prohibit such fees.

With billions of dollars in federal financial aid flowing through colleges to students, "banks want a piece of the action," said Christine Lindstrom, higher education program director at U.S. PIRG. The Education Department's rule doesn't ban all fees or prohibit schools from striking revenue-sharing deals with banks, but it "levels the playing field," she said.

Banks' trade associations in Washington criticized the Education Department's rule by arguing it would limit students' banking options.

"For banks that partner with colleges, the message is not just that the value of these partnerships will decline. It is also that colleges are now deputized to ensure that fees that students pay are reasonable," Jaret Seiberg, an analyst at Guggenheim Partners, said in a note to clients. "That could fundamentally change the nature of these partnerships and cause some lenders to rethink whether it's worth staying in this particular business."

But to consumer advocates, the rule shows that the Education Department "saw a structural problem and took quick action," said Maura Dundon, senior policy counsel at the Center for Responsible Lending. "This shows effective government," she said.