The Education Department released a package of draft rules on Thursday that would tighten a distance-education regulation blocked by the courts in 2011 and would set strict standards for college-affiliated debit cards.
The package, which a panel of negotiators will debate next week, doesn’t include changes in the underwriting criteria for Parent PLUS loans. That much-anticipated proposal won’t be released until next month, to give the negotiators time to review data on defaults in the program, department officials said. They promised to provide the data before next week’s rule-making session and proposed a fourth session, in May.
The new distance-education regulation, known as the “state authorization” rule, would, like the original, require colleges to seek approval to operate from states where they enroll students online. Unlike the original rule, which was overturned on the grounds that colleges had not been given enough time to review it, the new proposal would recognize state-to-state agreements and reciprocity arrangements as evidence of such approval.
That’s good news for colleges in states that have applied to participate in the “State Authorization Reciprocity Agreement” developed by the country’s four regional higher-education compacts and several higher-education associations. SARA, as the agreement is known, is designed to streamline the state-approvals process and to reduce costs for colleges.
A ‘Change in Tone’
But the rule contains other changes that could significantly increase the burden on states and institutions. In particular, it would no longer consider colleges approved in states that exempt distance-education programs from their purview.
Gregory Ferenbach, a lawyer with Cooley LLP who has followed the rule closely, said that change would require states to regulate online learning “whether they want to or not.” Currently, three-quarters of states don’t oversee purely online programs at all, he said.
“The whole federalism principle of leaving it to the states to regulate this activity certainly goes right out the window,” he said.
Russell Poulin, a negotiator, said he was “disappointed by the perceived change in tone from the department.”
“The original regulation was elegant and trusted the states,” said Mr. Poulin, who is deputy director for research and analysis at the Western Interstate Commission for Higher Education’s Cooperative for Educational Technologies. “The proposed language is prescriptive and will take great effort by the states to comply. Institutions that are currently approved in some states will need to reapply.”
Consumer advocates, meanwhile, said they worried that reciprocity agreements would weaken state oversight. Under SARA, states agree to recognize approvals from an institution’s home state, even if that state’s process is less rigorous than their own.
Still, advocates were pleased the department added language requiring institutions participating in state-to-state and reciprocity agreements to inform students of the complaint process available to them. Christine Lindstrom, a negotiator who is the higher-education program director for the U.S. Public Interest Research Groups, said such a “clearly defined avenue for complaints” was “an essential step forward.”
“Students enrolled in distance education, in particular at for-profit colleges outside of their home state, simply don’t have the same consumer protections that students attending school inside their home state do,” she said. “That’s just not fair.”
The rule would also set new standards for foreign locations of domestic institutions, requiring colleges to obtain authorization from the foreign country, along with approval from their accreditor, and have a process in place for handling student complaints.
Debit Cards
The proposed rule on debit cards would explicitly ban overdraft fees and would prohibit colleges from offering cards “co-branded” with an institution’s mascot or logo. Students could not be sent cards automatically, as some are now, and they would be granted fee-free access to any ATM in any state.
More than 850 American institutions have agreements with banks or other financial companies to provide debit- or prepaid-card services to their students, and most allow students to receive federal student-aid refunds on the cards. The fees associated with such cards are generally in line with products offered by banks, although most banks don’t charge for purchases made with a PIN, as some college-affiliated cards do.
Under the draft rule, colleges that contract with third parties to deliver aid refunds would be required to make their arrangements public; inform students and parents of the terms and conditions of their accounts; and obtain students’ written approval to open accounts for them.
The colleges would also have to review any materials the third party provided to students and parents to ensure they were “objective” and “neutral.”
The rule would also make direct deposit of student-aid refunds the preferred option, requiring colleges to request that students use their personal bank accounts for receiving refunds before helping them apply for a sponsored account.
The changes were welcomed by consumer advocates for students, who have long complained that students are being steered into products that carry unreasonable fees.
‘Not Strong Enough’
Still, the rule doesn’t go as far as student and consumer advocates would like. They have asked the department to ban all fees, particularly the 50-cent PIN-transaction fee. While the rule would bar “account maintenance” fees, it’s unclear if the prohibition extends to account-inactivity fees and PIN-transaction fees.
Maxwell J. Love, vice president of the United States Student Association and an alternate on the rule-making panel, said the rule would make some positive changes, but was still “not strong enough.”
Providers of the cards, not surprisingly, oppose the changes. In a statement, the Network Prepaid Card Association said debit and prepaid cards were already heavily regulated. The group warned that banning maintenance and ATM fees would “likely make it challenging for schools to offer these accounts.”
Doug A. Schantz, director of the office of student accounts at Wittenberg University, which has a debit-card arrangement with Higher One, the nation’s dominant provider, said the requirement that students specifically request a card, and not be sent one automatically, could slow the delivery of their student aid.
The proposed rule also includes new language aimed at curtailing fraud. It would require colleges to delay direct refunds in cases where they suspect a student or parent is defrauding the government or is enrolling for the sole purpose of receiving federal student aid. That change is a response to reports from the department’s Office of Inspector General and others that student-aid fraud is on the rise.