BILL ANALYSIS                                                                                                                                                                                                    Ó






                           SENATE COMMITTEE ON EDUCATION
                                 Carol Liu, Chair
                             2013-2014 Regular Session
                                         

          BILL NO:       SB 845
          AUTHOR:        Correa
          AMENDED:       February 25, 2014
          FISCAL COMM:   Yes            HEARING DATE:  March 26, 2014
          URGENCY:       No             CONSULTANT:Kathleen Chavira

           NOTE  :  This bill has been referred to the Committees on  
                    Education and Banking 
          and Financial Institutions.  A "do pass" motion should include  
                    referral to the 
          Committee on Banking and Financial Institutions.
           
          SUBJECT  :  Electronic disbursement of student financial aid.
          
           SUMMARY 

          This bill requires the California Community College (CCC)  
          Board of Governors (BOG) and the California State University  
          (CSU) Trustees, and requests the Regents of the University of  
          California (UC) and the governing body of an accredited  
          private postsecondary educational institution, to develop one  
          or more model contracts for use by their respective systems  
          for the disbursement of student financial aid onto debit  
          cards, prepaid cards or other preloaded cards issued by a  
          financial institution, as specified. 

           BACKGROUND  

          Federal regulations establish rules for the disbursement of  
          federal financial aid to students. These rules authorize a  
          school to establish a policy requiring its students to provide  
          bank account information, or open an account at a bank of  
          their choosing as long as this policy does not delay the  
          disbursement of Federal Student Aid funds to students. In  
          situations where a school opens a bank account on behalf of  
          the student, the rules require that schools comply with  
          conditions related to consent, notice, disclosure and costs to  
          open or transact on the account and additionally require that  
          the school ensure that the student has convenient access to a  
          branch office or ATMS of the bank so that the student does not  
          incur any cost in making cash withdrawals. Additionally, the  




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          regulations require that the branch office or ATMs be located  
          on the institution's campus, in institutionally-owned or  
          operated facilities, or immediately adjacent to and accessible  
          from the campus. These rules also include conditions that must  
          be met if a school uses a store value card or prepaid debit  
          cards. 
          (34 California Code of Federal Regulations (CFR) 668 164(c)  
          (3))

          Current law defines the term "debit card" as an accepted card  
          or other means of access to a debit cardholder's account that  
          may be used to initiate electronic fund transfers and may be  
          used without unique identifying information such as a personal  
          identification number to initiate access to the debit  
          cardholder's account. 
          (Civil Code [CIV] § 1748.30)
          Current law provides for a variety of student financial aid  
          programs including the Cal Grant programs and the CCC Board of  
          Governors fee waiver program.  Current law requires that  
          eligibility for a Cal Grant and the determination of financial  
          need be accomplished using the Free Application for Federal  
          Student Aid (FAFSA), and that this application be used for all  
          programs funded by the state or a public institution of  
          post-secondary education as well as all federal programs  
          administered by a postsecondary educational institution.   
          (Education Code § 69432.9 and § 69433)

           ANALYSIS
           
           This bill:
           
          1)   Requires the CCC Board of Governors and the CSU Trustees,  
               and requests the UC Regents and the governing body of an  
               accredited private postsecondary educational institution  
               to:
                
                    a)             Develop one or more model contracts  
                    for use by their respective systems for the  
                    disbursement of student financial aid onto debit  
                    cards, prepaid cards or other preloaded cards issued  
                    by a financial institution.

                    b)             Develop the model contract in  
                    consultation with stakeholders that include  
                    statewide student associations, individual campuses  
                    and financial institutions. 




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          2)   Requires and requests that the entities identified in (1)  
               make every model contract developed publicly available on  
               its internet web site.

          3)   Requires that every model contract consider the best  
               interest of students and, at a minimum, contain  
               delineated provisions which are identical to the current  
               federal regulations governing the use of prepaid debit  
               cards for the disbursement of federal financial aid. 

          4)   Requires and requests that the entities in (1), when  
               developing each model contract, additionally consider:

                    a)             The number of on-campus, and  
                    proximity of off-campus, locations where students  
                    can make a fee-free withdrawal using a debit,  
                    prepaid, or preloaded card.

                    b)             The type and size of fees a student  
                    would incur from using the card.  


                    c)             The impact, if any, that offering a  
                    card which displays the mascot or campus or  
                    educational system name would have on students, the  
                    campus, or the educational system.

                    d)             The impact in any, of the content of  
                    a dispute resolution clause would have on students,  
                    the campus, or the educational system, if a conflict  
                    were to arise between a student and the card-issuing  
                    financial institution.


           STAFF COMMENTS  

           1)   Need for the bill  .   Colleges and universities are  
               increasingly contracting with financial institutions to  
               disburse financial aid and process credit balance  
               refunds. According to the author, one of the greatest  
               challenges facing students and policymakers is the highly  
               individualized approach taken by California campuses  
               toward these contracts with financial institutions.   
               Individual campuses are on their own when negotiating and  
               as a result, these contracts are often criticized as  




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               failing to uphold the best interests of students. Because  
               of their size and bargaining power, the systems are in a  
               much better position to negotiate contracts than  
               individual campuses.  In addition, the development of  
               model contracts will help ensure uniformity in the terms  
               and conditions that apply to the issuance of  
               debit/prepaid/preloaded cards to California's college  
               students. 

           2)   Recent Related Reports  .  Several recent reports have been  
               issued as the result of concerns being raised by federal  
               agencies, consumer advocacy groups and members of  
               congress. These include the following: 

                PIRG report:   According to a 2012 report by the U.S.  
               Public Interest   Research Group, Campus Debit Card Trap,  
               banks and financial firms are forming partnerships with  
               colleges and universities to produce campus ID cards and  
               to offer student aid disbursements on debit or prepaid  
               cards.   The federal government requires that schools  
               disburse financial aid refunds to students free of  
               charge; however, these debit cards can come with fees for  
               other services that can take away from students' aid.  As  
               a result students end up bearing some costs directly,  
               including per-swipe fees, inactivity fees, overdraft  
               fees, ATM fees and more.  

               The report contends that debit cards for disbursing funds  
               may be good for colleges, but argue that cash-strapped  
               students absorb the costs.  The U.S. Public Interest  
               Research Group study finds that some debit cards come  
               with fees as high as 50 cents per swipe in transaction  
               fees, $38.00 per overdraft and $10.00 for inactivity  
               after six months without use.  The PIRG study also finds  
               that students do not fully realize what they are signing  
               up for when they elect to receive their financial aid  
               award via debit card.

                GAO Report  :  In February 2014, the US Government  
               Accountability Office issued its report, College Debit  
               Cards:  Actions needed to address ATM Access, Student  
               Choice, and Transparency to the US Senate Committee on  
               Health, Education, Labor, and Pensions in response to  
               questions regarding fees and issues such as student  
               choice and based upon a performance audit conducted from  
               November 2012 to February 2014. In its review, the GAO  




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               identified 852 colleges and universities with card  
               agreements as of July 2013, representing 11 percent of  
               schools, and 39 percent of all students at schools,  
               participating in federal student aid programs.  
               Additionally, the GAO reports that the card agreements  
               are most common at public colleges and universities (29  
               percent, nationally).  

               With regard to fees, the GAO found that the US Department  
               of Education provides a limited definition of what  
               constitutes "convenient access," of those that they spoke  
               with, college card providers were generally unwilling or  
               unable to provide details of their fee revenues, and  
               though USDOE encourages schools to disclose information  
               on the costs incurred by their students for using their  
               college cards, none tracked such costs. In addition, the  
               GAO reports that guidance does not currently address the  
               marketing of cards or the extent to which schools must  
               inform students of financial aid payment options.  
               Finally, the report found that comprehensive information  
               on the prevalence and terms of these agreements and  
               students' experience using college cards is unavailable. 

               The GAO recommended that Congress consider requiring  
               financial firms to file their agreements for public  
               review and provide other relevant information, and that  
               the USDOE develop regulations that specify what  
               constitutes "convenient access" and develop requirements  
               for schools and card providers to provide neutral  
               information to students about their options for receiving  
               federal financial aid funds.

                Office of Inspector General, USDOE  : In 2014, the  
               Inspector General issued a management information report  
               Third Party Servicer Use of Debit Cards to Deliver Title  
               IV Funds.  The limited review examined four schools which  
               included a California community college and a CSU campus.  
               The report found that:

                     Schools that outsourced gave servicers significant  
                 control over the financial aid delivery process and  
                 relied on them to meet federal regulations without  
                 monitoring these activities.

                     Schools did not prevent servicers from using  
                 marketing and other strategies to influence student  




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                 choice.

                     In some cases, fees appeared to be unique or  
                 higher than those of other providers.
                
                     Financial incentives for schools created the  
                 potential for conflict of interest that could influence  
                 decisions at the expense of student interests.

                     Schools provided, or servicers collected, student  
                 information beyond that necessary to deliver financial  
                 aid and schools did not monitor services to ensure  
                 compliance with federal requirements regarding the  
                 handling of confidential student information.

               Among its recommendations, the Inspector General  
               suggested that the USDOE consider federal regulations to:

                     Require schools to monitor servicer's compliance  
                 with Title IV requirements and have a process to ensure  
                 resolution of any student complaints regarding the  
                 servicer.

                     Require servicers to provide objective and neutral  
                 information on student options.

                     Ensure that no transaction or administrative fees  
                 to access financial aid funds be charged and to require  
                 schools to compute and annually disclose the average  
                 cost incurred by students to students.

                     Define "convenient access" to fee-free ATMs.

                     Require schools to ensure servicers do not collect  
                 information from students beyond that necessary to  
                 perform the Title IV function, and that federal  
                 agencies consider what additional actions are required  
                 to ensure compliance with the Family Educational Rights  
                 and Privacy Act (FERPA).

           1)   Pending federal regulations  .  In November 2013, the US  
               Department of Education (USDOE) announced its intention  
               to establish a negotiated rulemaking committee to prepare  
               proposed regulations to address program integrity and  
               improvement issues for the Federal Student Aid Title IV  
               programs. Actual negotiations began in February 2014 and  




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               are scheduled to conclude on April 25, 2014.  At that  
               time, the USDOE will publish proposed rules in the  
               Federal Register for comment by the general public, and  
               then publish final regulations sometime thereafter. 

               This bill delineates specific provisions that must be  
               included in the model contracts that reflect  current   
               federal regulations governing the disbursement of federal  
               financial aid.  Based upon the reports outlined in staff  
               comment # 3, it appears that current federal regulations  
               may fall short of ensuring the "best interest of  
               students" as envisioned by this bill. Should this  
               committee endorse these specific provisions prior to the  
               adoption of new federal regulations which are expected to  
               provide more comprehensive and clear direction to schools  
               and financial institutions than current regulations?  
                
                Staff recommends the bill be amended to delete lines  
               24-38 on page 2 and lines 1-22 on page 3 and to instead  
               insert, "contain provisions that reflect conditions  
               required for compliance with federal regulations  
               governing the disbursement of federal financial aid."   

               The committee may also wish to reserve its prerogative to  
               review any changes to the bill reflecting federal  
               regulations once those have been adopted. 

           2)   Issues of concern  .  Notwithstanding the potential  
               adoption of new federal regulations, the recent reports  
               by the Government Accountability Office and Inspector  
               General raise a number of significant concerns about the  
               responsibility of educational institutions that contract  
               with third-party servicers to ensure compliance with  
               federal regulations.  For example, federal privacy laws  
               require that information disclosed without student  
               consent can only be for a legitimate educational  
               interest; disclosure to other than a school official be  
               for purposes of performing a function that the school  
               would normally perform; use and maintenance of the  
               records must be under the direct control of the school;  
               and finally, the third party is subject to federal  
               requirements governing the use and redisclosure of the  
               information. 

               Of particular concern for this committee are the  
               educational institutions' role in ensuring servicer's  




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               compliance with Title IV requirements, the protection of  
               student privacy as required under Family Educational  
               Rights and Privacy Act (FERPA), and the apparent lack of  
               information about the costs incurred by students to  
               access their financial aid funds. 

               This bill currently requires and requests the affected  
               entities, in developing their contracts to consider  
               specified issues. This language should be strengthened by  
               amending the provisions to ensure that educational  
               institutions consider 1) their role in monitoring  
               compliance with federal regulations 2) whether the  
               contract ensures student privacy as required under FERPA,  
               and 3) the provision of fee information by the servicer  
               to the institution.  

               Staff recommends the bill be amended on page 3 lines  
               23-38 as follows:

               (d) When developing each model contract, the board of  
               governors and the trustees shall, and the regents and  
               each governing body of an accredited private  
               postsecondary educational institution are  additionally   
               requested to, consider all of the following:

                (1) The number of on-campus locations and proximity of  
               off-campus locations where a fee-free withdrawal could be  
               made by a student using a debit card, prepaid card, or  
               preloaded card.

                (2) The type and size of fees a student would incur from  
               debit, prepaid, or preloaded card use  and whether  
               provisions ensure that the educational institution is  
               provided information by the card-issuing financial  
               institution to evaluate the costs of these fees to  
               students  .

                (3) The impact, if any, that offering a card displaying  
               the name or mascot of a campus or educational system  
               would have on students, that campus, or that educational  
               system.

                4) Whether the provisions ensure that the educational  
               institution monitors compliance by the financial  
               institution with federal Title IV requirements governing  
               the disbursement of financial aid. 




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               5) Whether the provisions ensure a process for the  
               tracking and resolution of student complaints about the  
               card-issuing financial services institution's credit  
               delivery, customer service, and debit, prepaid or  
               preloaded cards.

                 (4)  6) The impact, if any, of the content of a dispute  
               resolution clause on students, their campus, and their  
               educational system, if a conflict were to arise between a  
               student and the card-issuing financial institution.
                7) Whether the provisions ensure that the educational  
               institution does not provide student information beyond  
               that necessary to perform the contracted financial aid  
               disbursement function.

               8) Whether the provisions ensure that the card-issuing  
               financial institution does not solicit or collect  
               information from students, that is not necessary to  
               perform the contracted financial aid disbursement  
               function as a condition of accessing their financial  
               funds through a debit card, prepaid card, or preloaded  
               card.
                
           3)   Similar legislation  .  AB 1927 (Frazier) requires the  
               Board of Governors of the California Community Colleges  
               and the Trustees of the California State University  
               shall, and requested the Regents of the University of  
               California and the governing bodies of accredited private  
               nonprofit and for-profit postsecondary educational  
               institutions to adopt policies to be used for negotiating  
               contracts between their postsecondary educational  
               institutions and banks and other financial institutions  
               to disburse a student's financial aid award and other  
               refunds onto a debit card, prepaid card, or preloaded  
               card that best serves the needs of the students. AB 1927  
               is awaiting hearing in the Assembly Higher Education  
               Committee. 

           4)   Prior legislation  .  AB 1162 (Frazier, 2013) requires the  
               California Community College (CCC) Board of Governors  
               (BOG) and the California State University (CSU) Trustees  
               to adopt policies, that best serve the needs of the  
               students, when negotiating contracts with financial  
               institutions to disburse a student's financial aid award  
               onto debit, prepaid, or preloaded cards, and encourages  




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               consideration of specific elements in these policies. The  
               bill also requests the University of California (UC)  
               Regents and the governing bodies of private nonprofit and  
               for-profit postsecondary educational institutions to  
               comply with these provisions.  AB 1162 was heard and  
               passed by this committee by a vote of 6-2 in 2013, but  
               subsequently failed passage in the Senate Banking and  
               Finance Committee by a vote of 2-3. 
           
          SUPPORT  

          California State Student Association
          University of California Student Association

           OPPOSITION
           None received.