Prepaid Student Aid Card May Curb Spring Break Spending

 Allesandra Lanza

Next month, many college students will take part in an annual tradition: spring break. For students who have borrowed loans to pay for college and received a refund, the temptation to spend it on travel and fun this time of year can be strong. But the U.S. Department of Education's proposed new debit card aims to help students limit unnecessary expenditures.

The Department of Education is preparing to roll out the prepaid card as part of its new initiative to modernize student aid. The financial aid refund debit card would be combined with an app that will eventually offer a mobile version of the Free Application for Federal Student Aid, commonly referred to as the FAFSA. The myStudentAid app would allow users to access information about student loans and set up payment plans in one place.

The federal government originates federal student loans, which make up most student loans granted today. The funds are sent directly to the student's higher education institution and applied to tuition and fees.

However, tuition and fees are only a piece of a college's total cost of attendance. When a school estimates how much it will cost to attend for the year, it also factors in room and board, textbook costs and miscellaneous expenses – even the costs of traveling home for the holidays.

This total cost of attendance is used to determine a student's financial aid package. Thus, it is possible for students to be awarded a federal student loan amount in excess of their tuition bill for the semester.

These funds can be refunded in a few different ways: delivered as a paper check, deposited directly into a student's bank account or disbursed as a campus debit card. These cards are issued by the school and typically backed by commercial banks or other financial firms; oftentimes they're linked to students' campus ID or meal cards.

Campus debit cards have had their share of controversies in recent years with complaints about high fees charged for ATM usage and overdrafts. As a result, federal regulations were issued in 2015 during the Obama administration to crack down on these abuses.

With the proposed Department of Education debit card, parents will be allowed to deposit money directly to the card for their student's use. Presumably, the card will not come with the objectionable fees that sparked previous complaints about campus debit cards.

The Education Department plans to pilot the debit card with a limited number of students and colleges this spring. As many as 100,000 total students across four institutions, which have not been chosen yet, will participate.

At a Federal Student Aid training conference last fall, when plans for the mobile app were unveiled, government officials said one of their goals was to help students understand the long-term implications of spending student loan refunds on items unrelated to their education. The card's features are intended to allow students to better track where they spend their refund money as well as give them proactive reminders and coaching in real time about spending and account balances.

This sounds like a great way to help students develop better budget habits and resist the urge to splurge. After all, there have been documented cases of students using their refunds to buy cars, rent expensive apartments or finance extravagant trips, which can lead to serious regret down the road when monthly student loan payments are due.

Some consumer advocates say the FSA card could be a sign of government overreach – particularly because draft documentation for the pilot proposes not only prodding students into making better consumer decisions but also restricting the types of purchases students can make with the debit card.

However, A. Wayne Johnson, who leads a Strategy and Transformation unit at FSA, told Inside Higher Ed: "FSA does not currently envision restrictions being placed on the use of funds."

Critics of restricting debit card usage point out that students, particularly those who are financially independent – who outnumber traditional-age students these days – may need to use their student loan to help pay for expenses unrelated to education but still critical to their education success, such as reasonable transportation or child care.

Regardless of whether the FSA debit card one day restricts students' purchases or only offers advice, every student loan borrower should think of better ways to use their refund this spring. If money is left over after buying textbooks, school supplies or other essentials, you could always make an advance interest payment on an unsubsidized student loan.

Or if you overestimated expenses for the semester, you can always tell your financial aid office to return the funds to the government. This way, you will owe less at graduation – something your future self will be thankful for.

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Allesandra Lanza
30 November, 2017
Allesandra Lanza
19 November, 2017