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 SB 845 Page 2 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. SB 845 Page 3 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 SB 845 Page 4 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 SB 845 Page 5 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 SB 845 Page 6 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 SB 845 Page 7 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 SB 845 Page 8 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. SB 845 Page 9 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 SB 845 Page 10 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.