WASHINGTON, Oct. 28 (UPI) -- The Obama administration rolled out new rules that make it harder for colleges to force students to use prepaid debit cards for their student loan disbursements and expands the repayment options for millions of struggling borrowers.
One regulation reigns in so-called campus cards -- prepaid or debit cards used to disperse federal aid -- and the other expands the income-based repayment program to reach some five million more borrowers. Together the rules are aimed at helping student avoid financial trouble while they're in school and once they leave, Education Secretary Arne Duncan said.
"These regulations will help make sure student loan debt is affordable for all borrowers and bring overdue reforms to campus cards, a sector that too often puts taxpayer dollars and student consumers at risk," he said.
Beginning next fall, higher-education institutes can no longer require students to take the campus cards. Colleges use the cards to issue credit balances, or money left over when the financial aid award exceeds tuition and fees. The partnership between banks and colleges have left students with the impression the school is endorsing the financial institution. In some cases, students were given no choice but to sign up for the cards as a way to receive their financial aid. Some cards charge excessive and confusing fees, putting even more of a financial burden on students, critics say.
At least 850 schools, or 11 percent of U.S. colleges and universities, have agreements with financial institutions to provide the campus cards. Some $25 billion in Pell Grants and Direct Loans are distributed annually to up to 9 million students using these accounts.
"Students need objective, neutral information about their account options and they should be able to choose to receive deposits to their own bank accounts, rather than being forced to sign up for campus cards with unreasonable fees and obscure account terms," Education Undersecretary Ted Mitchell said.
In a separate move, the department finalized a regulation that expands the income-based loan repayment program, known as Revised Pay as You Earn or REPAYE, to cap payments at 10 percent of the borrowers' annual income. It also forgives the debt after 20 years of payments for undergraduate studies and 25 years for graduate studies.
The change means there are now five income-based student loan repayment options, but Congress may streamline the options when the Higher Education Act is reauthorized later this year. Both changes come as a growing number of borrowers are struggling to pay back student debt.
Nationally, student loans are the second-largest class of U.S. consumer debt behind mortgages. Since 2006, student debt has more than doubled from less than $600 billion to more than $1.2 trillion. The average balance is about $30,000.