According to a report from Federal Student Aid in 2018, the federal student loan debt was slightly over $1.4 trillion in the U.S. With the growing number of student loan borrowers; it is crucial to monitor and see that the students are using the financial aid wisely.
The U.S. Department of Education plans to pilot test a new debit card for students who have federal student loans.
The benefit that comes with this for the federal government is that it’s a transparent way to see if the students are spending the student aid properly.
On the side of the bank that will issue the debit cards, it is potential access to a base of the future middle-class income earners who could be potential clients.
For the students, the advantage is that it could be potentially saving as the card does not involve any fees and prevents them from overdrafts.
What are the potential benefits of this move?
In the case that the federal government uses their bargaining power to eliminate or somewhat reduce bank charges for the students; the overall college costs will be lower.
The move may help to streamline the schools’ processing of financial aid funds. Eventually, the distribution costs for approved student funds will reduce which saves the taxpayer.
The monitoring of how the students spend the money will help put restrictions, and they only spend money that they have.
Details on the debit card
An estimated 44 million citizens in the U.S. have student debt. The student balance is one of the most significant amounts of consumer debt in the U.S. as it exceeds auto loans and credit card debt.
The Federal Student Aid payment card’s primary function will be to handle refunds of the funds disbursed. A refund is an amount remaining of the student aid given to a specific student to help throughout the semester after the college fees are taken.
For example, if the federal student aid for student A is $5,000 each semester, and her college fees are $3,000, the refund will be $2,000. The primary objective for the refund is to help pay for other expenses such as books.
Here, the payment card will work like a prepaid debit card to simplify the process of transferring the refund from the Federal Student Aid to the student A as opposed to cutting a check for the refund transfer.
The payment card will ideally be convenient as it is set to be free compared to what campus-based banks charge; from $1 to $47 annually. The prepaid debit card will only allow students to spend the money in their accounts. This way, a debit card purchase will be declined in the case that the student has insufficient funds.
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Students will be forced to budget and live well within their means as they have no option of any extra expenses. There will be no more incurring additional debt by overdrawing their account balances.
Possible card restrictions
The payment card will be a type of restricted debit card where the issuer can restrict certain merchants from receiving payment for their goods or services to improve student aid distribution. For example, bookstores will not be restricted, but tattoo parlors are most likely off limits. During this pilot stage, there will be no category restrictions as it begins in 2019, but it’s a possibility in the future.
Participating banks will be required to provide data to Federal Student Aid how the students spend the money allocated to them.
The advantage of taking this new project as a bank
The question is, how would a bank be willing to risk by taking on such a project?
The bank will have the opportunity to be the financial service provider to millions of college students who will be the middle or upper-class income earners in a few years to come. The bank will be able to learn a student’s financial behavior, and they can easily sell them other bank products such as mortgages.
However, the U.S. Department could limit this privilege by the bank as their proposal states that the bank can only use student data if approved by the student loan borrowers themselves.
We applaud the Department of Education for the efforts to reduce the costs involved in student loans. The debit card will be beneficial to both the government and students as there will be no banking fees involved.
The major challenge here, however, will be how the bank uses the student borrower’s data. Also, how will the government restrict the card; on what grounds? On the positive, this is one initiative to look into.
