The U.S. Department of Education has issued proposed revisions to its Title IV Higher Education Act (HEA) cash management rules that include significant new restrictions on financial products used to disburse credit balance funds to students. Credit balances result when the amount of Title IV HEA program funds credited to a student’s account exceeds the amount of tuition and fees, room and board, and other allowed charges. Comments on the proposal are due on or before July 2, 2015.

The proposal would establish two different types of arrangements between postsecondary institutions and financial account providers, “tier one (T1) arrangements” and “tier two (T2) arrangements,” which are described as follows:

  • A T1 arrangement is an arrangement between an institution and a third-party servicer that performs one more of the functions associated with processing direct payments of Title IV funds on behalf of the institution to financial accounts that are offered to students and their parents by the servicer or any entity contracting or affiliated with the servicer.
  • A T2 arrangement is an arrangement between an institution and a financial institution or entity that offers financial accounts through a financial institution under which accounts are offered and directly marketed to students or their parents. A financial account would be deemed directly marketed if: (1) an institution communicates information directly to students or parents about the financial account and how it can be opened; (2) the financial account or access device is co-branded with the institution’s name, logo, mascot, or other affiliation; and (3) a card or tool that is provided to the student or parent for institutional purposes, such as a student ID card, is linked with the financial account or access device. The proposal would create a presumption that Title IV HEA program funds are deposited into financial accounts offered and marketed under T2 arrangements. To avoid the requirements for T2 arrangements, an institution would have to document that for the most recently completed award year, no student or parent received a credit balance.

The proposal would impose the following key restrictions:

  • An institution must establish a selection process that allows the student or parent to choose from one of several options for receiving Title IV funds. The process (1) prohibits the institution from requiring the student or parent to open or obtain an account or access device offered by or through a specific financial institution; (2) requires the institution to provide a list of options (which must include issuing a check) for receiving funds in which (i) such options are presented in a neutral manner (except that the student’s or parent’s preexisting bank account must be shown prominently as the first and default option), and (ii) the major features and commonly assessed fees associated with all of the institution’s T1 or T2 arrangements are shown; (3) requires the institution to ensure that electronic payments made to a preexisting account are as timely as, and no more onerous than, initiating payments to an account made available through a T1 or T2 arrangement, and (4) gives the student or parent the right to change his or her choice at any time as to how direct payments are made.
  • An institution must obtain the student’s or parent’s consent to open an account under a T1 or T2 arrangement before (1) sharing personal information (except name, address and e-mail address) about the student or parent with the third-party service provider, the financial institution at which the funds would be deposited, or the agents of either, and (2) an access device is sent to the student or parent or the student’s ID card or other card or tool provided for institutional purposes is linked to a financial account
  • An institution must ensure that (1) financial accounts are not marketed, portrayed as or converted to credit cards, (2) the student or parent has convenient, sufficient, and timely access to surcharge-free ATMs, incurs no cost for opening a financial account or receiving an access device, and (3) for accounts offered under T1 arrangements, no point-of-sale or overdraft fees are charged, and for at least 30 days after Title IV funds are deposited in the financial account, no charges are imposed by the institution, servicer, or servicer’s associated financial institution
  • An institution must disclose on its website any contract establishing a T1 or T2 arrangement and related information, such as the total monetary and nonmonetary consideration for the most recently completed award year paid or received by the parties under the terms of the contract
  • An institution must ensure that the terms of accounts offered pursuant to a T1 or T2 arrangement are not inconsistent with the best financial interests of students and parents, with such requirement deemed to be satisfied if the institution takes certain steps such as periodically reviewing whether fees imposed under an arrangement are excessive based on prevailing market rates and having a contractual right to terminate an arrangement based on student or parent complaints or a determination that fees imposed are excessive

Ballard Spahr’s Higher Education Group regularly advises educational institutions on compliance with the HEA and other applicable laws. The firm’s Consumer Financial Services Group is nationally recognized for its experience with the full range of federal and state consumer credit laws, its skill in litigation defense and avoidance, and its guidance in structuring and documenting new consumer financial services products.

For more information, please contact Consumer Financial Services Group Practice Leader Alan S. Kaplinsky at 215.864.8544 or, John L. Culhane, Jr., at 215.864.8535 or

Copyright © 2015 by Ballard Spahr LLP.
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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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