Obama administration looks to new rules to curb student debt

U.S. colleges will face new restrictions on using debit cards to distribute financial aid, and more people will have income-based options for repaying student loans under a pair of regulations given final approval by the Obama administration on Tuesday.

The rules first proposed by the Department of Education earlier this year require schools to provide students with more options for accessing their aid and expand eligibility for a federal program that ties monthly student loan payments to the borrower's income.

The two-pronged approach builds on the administration's work to reduce the amount of debt college students accrue and make it easier for them to repay their loans once they graduate, outgoing 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," Duncan said.

The first regulation takes aim at the debit and prepaid cards that a growing number of colleges and universities are issuing as student ID cards for use at campus stores and to give out aid and refunds. Federal officials estimate that more than 850 schools enrolling about 9 million students are dispersing nearly $25 billion in student loans and grants with campus-issued cards.

The cards and the accounts linked to them typically are managed by third-party financial providers under contracts that reduce costs or carry financial incentives for the schools, the Government Accounting Office reported last year.

The GAO and consumer advocates have warned that the convenience the cards offer has been offset in some cases by excessive user fees and by a lack of transparency about alternatives that might be more financially advantageous for students.

Once the new rules take effect in July 2017, campuses will be barred from instructing students to open a specific account for the purpose of receiving financial aid and will instead have to provide a list of choices that includes a student's preexisting bank account as the default option.

The other regulation finalized Tuesday will allow anyone who financed his or her education with federal loans to have their payments capped at 10 percent of their annual discretionary earnings. Previously, the most lenient income-based repayment schedule was available only to students who obtained their first loans after 2007. The change could benefit as many as 5 million people with outstanding federal student loans, the Department of Education said.

Under the terms of the expanded plan, students who took out loans as undergraduates would be eligible to have the balance forgiven after 20 years if they made a good-faith effort to stay current on their payments. Loans issued to graduate students would be forgiven after 25 years.

"Allowing all borrowers to enroll regardless of when they borrowed or how much they owe will help more struggling borrowers better manage their payments, including those who dropped out of school with low balances and are among the most likely to default," said Lauren Asher, president of The Institute for College Access & Success.

Asher's nonprofit research and advocacy group issued a report Tuesday saying that 69 percent of 2014 college graduates left school with outstanding student loans that averaged $28,950.