Program Integrity Negotiated Rulemaking Session 2, Day 2

Today is the second day of the second negotiated rulemaking session around Program Integrity at the U.S. Department of Education offices on K Street. Negotiators will meet for at least three full days from Wednesday through Friday. Periodic updates will appear below.

Issue 4: Cash Management

This morning’s conversation was a continuation of where yesterday’s discussion left off—cash management. This morning’s focus has been the proposals under §668.164 Disbursing Funds. One major change the Education Department proposed is that an institution may not include the cost of books and supplies as part of tuition and fees. Another new provision is that institutions may not require any student or parent to open or use a financial account at a specific institution and must request each student or parent to provide the information needed to make an EFT to the financial account the student or parent already has and use that account on file to make a direct payment.

Commentary:

According to the Department, the reason for the change not to allow the cost of books and supplies to be included within tuition and fees is that it no longer aligns with the legislative intent of various other provisions in the Higher Education Act. The regulation of allowing books and supplies to be included in tuition and fees dates back to somewhere in the ‘70s or ‘80s where the Department allowed schools to include cosmetology kits as part of tuition and fees to ensure all students had access to them. The Department has maintained that policy through the years to allow schools in other circumstances to include books and supplies as part of tuition and fees. This proposal would be a reversal of that as the intent of current legislation is to have transparency around the estimated price of books and supplies so that students have the option to choose something at a lower price. The old regulation runs counter to statutory requirement because the inclusion of books and supplies in tuition and fees isn’t transparent to students and takes away their ability to choose books and supplies from other providers.

One committee member commented that sometimes institutions include books and supplies as part of tuition and fees so that all students get the same thing. So in the example of the cosmetology kit, it could be the case that it isn’t necessarily that the student could have any cosmetology kit, it’s that they need a specific kit that has specific tools that matches what everyone else has.

Joan Piscitello, the treasurer of Iowa State University, commented that the intent of the law probably refers to physical books. Since a lot of books are now electronic and the university has to get a site license—it may not be something that the student can go out and get alone. Institutions need some flexibility in this instance. She recommended that things like a license to content be allowable as a course fee.

Chris Linstrom of U.S. PIRG echoed the concerns of others at the table. While she likes the direction of this provision in that it provides transparency and choice for students, it’s also important to recognize that there could be unintended consequences like the example Joan Piscitello mentioned.

The Department made an important clarification that they leave it to the discretion of the school to figure out what is considered tuition and fees. They don’t want to go in the direction of parsing that out. At the end of the day what they are worried about is if students can get the supplies on their own, than the institution shouldn’t be including them as part of tuition and fees.

Deborah Bushway, the chief academic officer at Capella University, recommended forming a subgroup to discuss this issue further.

With that, the Department moved on to the conditions for making a direct payment. As an administrative convenience, if there’s a minor balance of $200 or less on a student’s account from the prior year, they can use current year federal aid dollars to pay that off. The Department, in its new provisions, tried to provide clarity with what “prior year” means but recognized that the new draft provision as written doesn’t quite work.

David Swinton, president of Benedict College, questioned why students can only pay off a minor balance and whether there is an ability to increase that $200 carryover. The Department’s response is that even allowing $200 is stretching the limits of the statute. Pam Moran from the Department explained that there is a limit of what you can cover in the prior year so it doesn’t erode a student’s federal financial aid for the current year.

The last provisions discussed this morning had to do with sponsored accounts, student choice, and considering EFT to an existing bank account as the default option for disbursing federal student aid balances.

According to the Department, the changes in the proposal reflect that to the extent that a student has a bank account on file, that’s where institutions disburse any account balances. Otherwise other options have to be presented in a neutral way. This does not change whether institutions deliver funds via a check, institutions would still be able to do that.

Casey McGuane, the chief operations officer for Higher One, believes that this whole proposed section by the Department seems to limit choice for students. It may prevent a student from changing their refund choice to a better option than the bank they already have. According to him, requiring EFT as a preferred method for disbursal creates an arbitrary standard.

The Department explained that the policy objective is that students come to the institution banked and so that’s what this regulation is designed to do. When you start writing exceptions to that, you dilute the policy objective. You could end up in a situation where students supply information about their bank and instead of getting an EFT, that option will be circumvented and they will end up using a sponsored account whether it’s better or not.

Suzanne Martindale, staff attorney with Consumers Union, supported the regulation. She sees it as providing options to students while ensuring if they already have an account that they like somewhere else, they can keep it.

Maxwell John Love, the vice president of the United States Student Association, made an important comment to push back on other committee members’ assertions that students sponsored accounts have better terms than their personal bank accounts might. “They don’t necessarily want a choice,” he explained, “They want an option that protects them against exploitive fees and protects their federal student aid. This isn’t just about their own money.”

The Department alluded to the fact that this language might need reworking, but that they don’t want to lose the language of using an existing account on file for the students.

After the lunch break, the Department continued to call for feedback on provisions regarding student choice and sponsored accounts. They clarified that there’s nothing in the proposed rules that prevents a school from saying, “I’m just issuing a check to everyone.” Under the proposed rules, institutions can still do that. They are not mandating that a school must do an EFT for federal student aid balances. But if the student doesn’t indicate a bank account, and the institution is going to present options, the new “student choice” provision would require institutions to provide those options in a neutral manner.

Chris Lindstrom of U.S. PIRG commended the Department for crafting a provision that goes a long way to resolve potential conflicts of interests between higher education institutions and financial institutions. She believes this fix is important for students.

Much of the remaining discussion of the day had to do with provisions about sponsored accounts, specifically the associated fees of these accounts. Many of the Department’s proposed regulations for sponsored accounts entail ensuring that the student incurs no cost in opening accounts, maintaining the account, transaction fees, and overdraft fees.

David Swinton responded to the draft language by saying, “There’s nothing free about being able to do these transactions.” He wanted to know how the institution would even be able to ensure that the student did not incur any fees on their account. He thinks that as long as financial institutions are reasonable and transparent with the charges and fees on a sponsored account, that should be enough.

Chris Lindstrom commented that she likes this provision since sometimes using these sponsored accounts is in the institution’s financial interest, not the student’s and this would help protect the student.

The discussion on transaction fees continued for almost the remainder of the session. When one negotiator brought up that even the transaction fee terms on the Direct Express card for federal benefits leave much to be desired, Paul Kundert, the president and CEO of the University of Wisconsin Credit Union, commented that the Department shouldn’t assume that business officers can negotiate better terms with financial institutions than the Secretary of Treasury. If the Secretary of Treasury can’t negotiate better terms, institutions are even more unlikely to be able to negotiate a completely no fee sponsored account.

After a couple more minor draft regulations were discussed, the meeting was adjourned.

Tomorrow’s PLUS Preview:

Expect an in-depth discussion and debate about Issue 6: Definition of Adverse Credit Criteria of the PLUS Loan. You can prepare by reading my brief on the topic here.

During the first session of this negotiated rulemaking, many committee members asked the Department for better data on PLUS loans, including reasons students were rejected and default rates. At the end of today’s session, the Department furnished the committee with some of their requests.

Without knowing anything about how exactly the data were cut and where they were drawn from, my initial observation is that it looks like the change in 2011 to include an account in collections as part of the credit check was the biggest driver in the increase in PLUS declinations. But this doesn’t mean the policy of including an account in collections is bad. Indeed, an account in collections is an indication of financial health and is used in part to determine one’s credit score. Also important to note is that the Department has an appeals process with de minimis standards in place for when that account in collections is for smaller balances.

At this point, for those calling to revert back to the old standards, it seems to me that the definition of adverse credit would have to say something along the lines of, “cannot include an account in collections.” That would dilute the policy goal of not lending to someone with an “adverse credit history” since an account in collections is literally used by lenders as a reasonable component of an adverse credit history.

As for default rates, some may say that they look relatively low, but it’s also important to remember that PLUS borrowers have to go through a credit check so the rate will be lower than the rates for federal Stafford loans. That caveat aside, what’s really interesting is the significant upward trends in Parent PLUS defaults. In FY 2006 (again, not 100 percent sure how the data were cut) the overall Parent PLUS three-year Cohort Default Rate (CDR) based on borrowers entering repayment after in-school deferment was 1.6 percent. By FY 2010, the three-year CDR was 5.1 percent. In 2006 at for-profit institutions, the CDR was 4.7 percent. In 2010 it had jumped to 13.3 percent. That’s a concerning trend.

Historically black colleges and universities, which can be public or nonprofit institutions, have been most vocal about the credit change and their desire for the Department to revert back to the pre-2011 standard. What’s troubling is that they are not featured as one of the sectors of analysis even though they have been one of the sectors most affected by the change. Instead, the Department only splits up the sectors by nonprofit, public, and for-profit status. It would help if they drilled down within the sectors even more.

Indeed, without any institution-level CDRs, which many committee members have already requested, there is no way for policymakers, researchers, and consumers to understand how parents or grad students fare at paying back these loans at specific schools.  Terrible actors can hide under aggregate CDRs. This can have brutal consequences for students and families. Hundreds of institutions with official CDRs over 30 percent face sanctions from the Department including loss of title IV eligibility. Since PLUS loans are not a component of official CDRs, they seem to be an easy way to skirt accountability.  That's not a change that can be made during negotiated rulemaking but at the very least, the Department needs to publicly release institution-level PLUS CDRs.

At the end of the day, just because Parent PLUS default numbers overall seem low, doesn’t mean they don’t have severe consequences for parents struggling to meet their loan obligations. Especially considering Parent PLUS loans are uncapped, come at a higher interest rate compared with other federal student loans, and aren’t eligible for Income-Based Repayment or Pay as You Earn.

Bottom line, what we need is a fairer solution that gives parents access to funds while protecting their financial interests. Adding an ability to repay to the credit check for a Parent PLUS loan would be fair and the Department may be able to do it through regulation depending on how “adverse credit history” is defined. This would ensure that parents could have access to a loan for their child’s education without financially ruining themselves.

More about PLUS loans and Issue 5: Retaking Coursework tomorrow.

Stay tuned for day three of session two. Or you can attend in person at 1990 K Street, N.W., Eighth Floor Conference Center, Washington, DC. If you do, drop by and say hello!