March 7, 2019
The headline says, “New Debit Card for Federal Student Loan Borrowers Could Save Money, but Concerns Linger." My focus turned immediately to “concerns."
If you've been a regular reader of my columns, you know that my most referenced topic is student loan debt and the miseries that accompany it, long after graduation. Earlier this week, I mentioned the new Florida action that revokes the medical licenses of health care workers who have fallen into default on their student loan payments. This is a serious consequence, since it prohibits the defaulters from continuing their livelihoods.
I predict a fast-developing national effort to clamp down on defaulters. The outlook for student loan defaults is staggering. According to CNBC (with my bold emphasis), “More than 1 million student loan borrowers each year go into default. Outstanding education debt in the U.S. has tripled over the last decade and now exceeds $1.5 trillion, posing a greater burden to Americans than auto or credit card debt. For many, the payments are proving unmanageable. By 2023, nearly 40 percent of borrowers are expected to default on their student loans. That's when a person has not made a payment toward their education debt in roughly a year, triggering it being sent to a third-party collection agency."
What would happen if you didn't make your mortgage or car payment for a year? Right. You would be out on the street without a car to go shopping for a new residence. The word “default" should not be in a college student's vocabulary, or even lurking in the back of his or her mind.
So, what's the deal with this new debit card initiative? Let's take a closer look. Here are some highlights from Lewis Mandell's thoughts as cited in HigherEdJobs:
The U.S. Department of Education is about to pilot test a new debit card for students who get federal student loans.
For the federal government, it means less hassle and a way to get a glimpse at whether students are spending their student aid wisely. For the bank that gets to issue the card, it means access to a tremendous base of future middle-class clients. For students, it means potential savings since the card has no fees and prevents students from overdrafts.
As a scholar of both payment cards and financial literacy for young adults, I see benefits but also a serious potential downside to the debit card.
- By streamlining schools' processing of financial aid funds, the administrative costs of distributing approved student aid can be reduced and result in some taxpayer savings.
- Second, if the federal government uses its bargaining power to reduce -- or eliminate -- banking fees for students, it will help lower overall college costs.
- Third, some students may benefit by having restrictions placed on their ability to spend more money than they have.
I have to raise an eyebrow when I see phrases such as, “some taxpayer savings." When's the last time you experienced tax savings because of an administrative change by the federal government? This always reminds me of the feared greeting, “Hi, we're from the government and we're here to help!" Look out.
I'm thinking about meaningful benefits. Bank fees? Perhaps. But eliminating bank fees? As economist Harley Lutz once said, there's no such thing as a free lunch. Banks are going to get their pound of fees one way or the other. Eliminating bank fees would eventually echo back onto taxpayers and offset those alleged taxpayer savings.
Now, here's something of which you may not be aware, and it's being touted as a benefit of the debit card. Back to Mandell:
… A major function of the Federal Student Aid payment card is to handle the "refund" of funds disbursed through the agency. In this context, a refund is the remaining amount of federal student aid given to a student to help support a semester of college, after tuition and other college fees have been taken.
For example, if Makayla's federal student aid is $10,000 per semester while her tuition and fees are $6,000, Makayla's refund would equal $4,000. The purpose of the refund is to help pay her other expenses such as books, a computer and personal items. The payment card, which would work like a prepaid debit card, could simplify the payment process by transferring the refund directly from Federal Student Aid to the student, bypassing the need for the college to cut a check or otherwise transfer the refund to the student.
The payment card would be convenient for students since a pre-paid debit card would substitute for a checking account. In fact, the payment card is specified to be totally free for students, with no minimum balance requirements. Historically, about half of campus-based banks have charged fees for their accounts that ranged from $1 to 47 annually.
With a prepaid debit card, students can spend only the money they have in their account and cannot rack up large fees for insufficient funds since a debit card purchase will be declined if it exceeds the student's current bank balance. Aside from protecting the lender, this may also force students to budget and live within their means since they cannot incur additional debt by overdrawing their account balances. It may be embarrassing to have one's debit card declined for insufficient funds, but at least having a debit card declined is not illegal and won't cause students to get overdraft fees like they would if they wrote a bad check. ...
Buying “personal items" with student loan funds is something that may surprise you. My student loan experience demanded that 100 percent of the loan(s) went to the college to pay for tuition, room and board. Anything beyond that was covered by funds from mom and dad or my part-time work. What's this $4,000 “refund" that Makayla is getting in Mandell's example? Maybe this will help you understand: How to Spend Your Student Loan Money:
It's that time of the year when students start to receive their financial aid refunds. This typically occurs when students have either secured enough money through grants and scholarships to cover their tuition and fees, or they have borrowed more student loan money than they actually needed.
I'm wondering about the rationale for borrowing more money than you actually need through student loans. The anonymous writer, to whom I shall refer to as Captain Obvious notes (again with my bold emphasis):
If you fall into the second category, don't rush out and spend that money just yet. Unlike the money you may have received from a scholarship or grant, your student loan money will eventually need to be paid back. I know it can be tempting to splurge a little, especially if you have been strapped for cash the last few weeks, but trust me when I say you'll regret it after graduation.
Why? Student loans carry substantial principal and interest payments which can come back to haunt you later if you're not careful and don't budget accordingly. If you find you have a little extra money coming back to you this semester, here are few do's and don'ts to consider when deciding how to spend your student loan money.
Duh. Captain Obvious then provides two lists. The first covers the right things to spend your student loan “refund" on. (I'm still having trouble understanding why anyone would borrow more than they need for their college costs.) The “right" things include books, supplies, utilities, tuition and fees for forthcoming semesters. These make sense and seem a reasonable application of student loan money.
However, the “wrong things to spend it on" list is hilarious:
- A weekend getaway to Las Vegas.
- Drinks for everyone at the club.
- The new spring collection at Forever 21.
- Pizza for the entire dormitory.
- Black lighting and a disco ball in your dorm room.
- Concert tickets to your favorite bands.
- Spring Break in Cancun.
I'm willing to bet that some students have spent loan refund money on items like this while rationalizing, “Eat, drink and be merry, dudes, for tomorrow we default!"
Getting back to Mandell, he voices his concerns about the student loan debit card. The gigantic pile of red tape that accompanies the debit cards, while seemingly restrictive, at least for now does nothing to prevent refunds paying for a Cancun spring break:
… In the payment card world, every type of business is given a four-digit Merchant Category Code that describes what they sell. It is possible that bookstores would not be restricted while bars and tattoo parlors could eventually be made off limits. In addition to possible arbitrary, values-based restrictions, constraints can cause problems for "nontraditional students" such as single parents who may need their refunds to pay for rent or daycare. It appears that no category restrictions will take place during the pilot phase, which begins in 2019, although they may be possible in the future.…
What could possibly go wrong with this plan? And don't forget about the banks' ulterior motives for participating in “a new, complex, rules-ridden project with no fees and unprofitable student customers who tend to carry low balances but do a large number of transactions ..." I think the term is “targeted marketing." It's like the “12 months same as cash" deals we all like. All these debit card students will fall into the pool of aggressively pursued future loan customers for mortgages, cars, furniture, cosmetic surgery, etc. after graduation. Most of us are no doubt in one of these target pools somewhere.
… The primary downsides of such a payment card depend on how student loan borrower data are used and how the card might be restricted in the future.
In short, the Federal Student Aid payment card will ultimately be seen as a rather small but efficient technological change in the way student financial aid is transmitted. But it will do little, if anything, to lessen the overriding problems caused by unmanageable student loan obligations taken on by many unwitting students.
“... unmanageable student loan obligations taken on by many unwitting students." From now on, I think I'll end all my student loan debt sermons with some variation of that succinct cautionary wisdom. In the meantime, if you're getting a “refund" on your student loans, ask yourself a simple question: “How did I let this happen?" Think about that.
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