Colleges Let Student Loan Servicers Do Sketchy Stuff

Colleges are engaging in some serious sketchiness when it comes to getting financial aid money to their students.

What do you mean?

Students who take out federal loans to help pay for college sometimes receive the money on a debit card. It sounds reasonable enough. Colleges receive money for tuition and other school expenses like room and board from the Education Department. If a student has any remaining balance, he or she can choose to receive it on a debit card and use it to pay for things like textbooks.

There are restrictions against imposing fees on students trying to access the money and, in theory, students are protected.

That should be the end of the story. But the reality is a little messier, according to a new report from the Education Department’s Inspector General.

Why?

Some schools, increasingly strapped for cash and resources, have outsourced the job of delivering aid to students. The colleges are supposed to monitor these “servicers,” but the report says as blatantly as a government report can say that some are doing a crummy job.

For one thing, the report found that students who received their balance of loan money on a debit card often paid high fees.

Wait, what about those rules against fees?

The servicers can be sneaky.

As the report notes, the servicers “appeared to deliver Title IV funds to students without charging fees. However, students who chose a servicer’s debit card option could incur fees after the servicer deposited the funds into the student accounts.”

In other words, there’s no fee to deposit the money, but there is to access it.

One way these servicers are supposed to help students avoid fees is by setting up ATMs on campus or very nearby, which would allow students to withdraw money from their cards without a fee. In fact, they’re legally required to.

Except the report’s authors found that some servicers have blatantly ignored this rule.

One of the schools they looked at was El Camino College, a two-year public community college. The main campus had three ATMs on campus, but they were owned by a local credit union that had an exclusivity agreement with the college that prevented the installation of other ATMs. Students using Sallie Mae debit cards to access loan money paid $4.25 in fees for every withdrawal. You can buy a lot of note paper for that amount.

The report also found that servicers charged absurdly high fees for things like card replacement. Many banks offer that service for free or for a very low fee, but student loan servicers sometimes charged between $15 and $20.

Well, resources are tight, you might say. They can’t monitor everything. Even if that were true, the report shows that the schools were doing a whole lot more than not monitoring. They were enjoying kickbacks from servicers. Schools and servicers negotiated contracts that essentially gave money to schools for promoting the debit cards as the best delivery option for loan money.

Are there other ways to get the money?

Yes, but a lot of students don’t know that because servicers and schools do a great job of promoting the debit card option and a terrible job of promoting other options, like direct deposit to an existing account or a good old-fashioned check in the mail.

[A note on the alternatives, though. They’re not fail-safe. Students are subject to fees charged by their banks and sometimes there are check-cashing fees if they choose the check option.]

But servicers don’t want students to know that. Higher One, for example, sent students an overview of delivery options that included an inactive debit card with the student’s name already on it and instructions to log on to their website to choose a delivery option. Once they logged on, Higher One peppered them with more marketing promoting the debit card option.

Sallie Mae and El Camino College engaged in a similar practice. The school sent students an email that promoted the servicer’s debit card because the more students chose that option, the lower the overall cost of using Sallie Mae to the school.

Students first, right?

Some schools are also breaking rules when it comes to sharing student information with servicers. The servicers, legally, are only entitled to information they need to do their job. They’re getting a lot more.

Each of the three schools the report examined provided information to the servicers that was technically optional — things like phone numbers, email addresses and birthdates.

The upshot: there is some serious sketchiness going on in a system that exists supposedly to benefit students.

So what happens now?

Here’s what Higher One said in an email to Fusion:

“Since the time of this review initiated in 2010, we have made significant improvements to our offerings, including the introduction of additional consumer safeguards, the elimination of several checking account fees, and a facelift to the online experience to give students a clearer picture of all their refund choices. We always look for ways to improve our services and continue to provide students with immediate, no-cost access to their student loan refund, banking services regardless of a student’s financial history with access to financial literacy and in a transparent way.”

Sallie Mae, the other servicer mentioned by the report, said in an email, “Sallie Mae exited the refund disbursement last year and Higher One acquired it.”

The Education Department’s Office of Postsecondary Education (OPE) and its Federal Student Aid office have acknowledged the report and said they “concurred” with its suggestions for increased monitoring and protections for students.

The department is currently negotiating rules on how loan money is dispersed, so the report comes at an opportune time. But the OPE is already hedging, saying it’s early in the process and uncertain which changes will ultimately be implemented. They have agreed to take some action, though. They’ve said they’ll make sure students at El Camino College have access to a fee-free ATM, for example, and essentially that they’ll look into issues like student privacy and school conflicts of interest.

It’s a step in the right direction, but whether practices actually change is uncertain. There are already regulations designed to protect students. Schools, and the servicers they hire, need to do a better job of following them.

Emily DeRuy is a Washington, D.C.-based associate editor, covering education, reproductive rights, and inequality. A San Francisco native, she enjoys Giants baseball and misses Philz terribly.