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Worst-case scenarios for campuses under new DOE financial aid disbursement regs

Campus card offices lose bank partners, financial aid offices lose outsourcing

Chris Corum   ||   Jun 30, 2015  ||   

Examining the pure T2 providers, there are some that provide financial accounts or card payment products for the primary purpose of accepting excess financial aid dollars. For these relationships, it seems obvious that T2 status would apply. An example of this would be the BlackboardPay offering that provides an open loop, prepaid card for campuses to deliver excess financial aid.

Less obvious, however, are the many contractual relationships between a campus and a provider that establish accounts or card payment products for purposes totally separate from financial aid disbursement. The fact that these accounts or cards have been or could be specified by even one student to receive excess financial aid seems to put them into the T2 classification. That status forces both the providers and campuses contracting with them to adhere to the new regulations.

[pullquote]The regs create an equal or greater burden on the campus as they do on the T2 provider so some campuses may opt to end a T2 service rather than meet the new requirements.[/pullquote]

The big difference between the tiers is that T2 does not restrict the fees that can be charged to users. As it relates to fees, the only requirement for T2 providers is that they provide “reasonable access” to surcharge-free ATMs. At first glance, this would seem to make the regulation revenue neutral to T2 providers, but this is not the case as other requirements will add cost and reduce the number of account holders.

While it does not limit fees, the proposed regulation does restrict how accounts and card payment products are offered, marketed and delivered to students in both T2 and T1 relationships. Key requirements include:

  • Can’t require students to open the account
  • Must provide a neutrally-presented list of account options that a student may choose from to receive excess financial aid dollars, and the student’s preexisting bank account must be the first, most prominent, and default option
  • Must ensure disbursements to the preexisting account are as timely as those made to the T1 or T2 account
  • Must obtain consent from the student or parent to open an account before the institution shares personal information with the account provider and before a card is provided or the student’s ID card is linked with the account
  • Must make publicly available the contract, including costs and fees, between the campus and the T1 or T2 provider
  • Must evaluate T1 and T2 contracts in light of the best financial interests of students

In T2 relationships, most of these requirements create an equal or greater burden on the campus than they do on the provider. Presenting disbursement options, ensuring timely delivery and obtaining consent are all requirements that the campus must undertake as the T2 provider is simply one of a number of potential delivery points for aid dollars. They have neither impact on nor participation in the overall process.

For this reason, some campuses may find it preferable to end a T2 relationship rather than meet the new requirements.

Returning to the topic of worst-case scenarios, will T2 providers exit the market?

In every instance listed above, the T2 business is a sliver of the provider’s total revenues. To large financial institutions, these partnerships with student ID card programs are barely a blip on the financial radar. The same is true for the BlackboardPay product’s contribution to overall corporate revenues.

The possible exception could be those campuses that have a T2 relationship with a local financial institution or credit union, as it could be a more appreciable portion of overall business.

What does this mean? It seems it would not be difficult from a purely financial perspective for most T2 providers to simply walk away from the business.

Sure there are contracts, loyalties, friendships, reputational risks and more that discourage such moves, but these will likely be outweighed – at least in some instances – by other forces.

As stated before, the financial addition to the provider’s overall bottom line is typically not major. Add to this the fact that the new restrictions will reduce the number of students opting for the T2 service, and the picture gets worse for T2 continuation. Fewer account holders will further squeeze both current revenues and the future income potential as students matriculate -- the lifelong customer aspect that attracts many T2 providers to higher education.

[pullquote]New restrictions will reduce the number of students opting for the T2 service, so current and longterm revenues will shrink. For those already questioning the viability of this line of business, the new regs could provide an easy out.[/pullquote]

It will also force T2 providers to invest in process reengineering, revise materials and collateral, reevaluate staffing in on-campus or near-campus offices, disclose contracts and more.

In light of these negative forces, some T2 providers may choose to exit. And for others that were already questioning the viability of this line of business, they could see this as an easy out.

T2 providers are likely exploring how many student account holders they might attract if the same level of investment was devoted to student-oriented marketing efforts instead of the myriad of costs associated with maintaining a dedicated line of business.

Rather than exit the business, other T2 providers may seek to modify the relationship with the campus or account holder to maintain profitability of the service. Campuses may find providers seeking to curb revenue sharing, reduce rent for on-campus space or institute new fees. Students and other account holders may see monthly account fees or other new charges.

For some campuses, the loss of a T2 relationship will simply require process reengineering. For others it will also entail a loss of dollars earned via revenue share from the T2 relationship.

What should a campus do today?

It is unrealistic to expect that an unplanned, unbudgeted reengineering of a major client-facing system could go from conception to full deployment in less than twelve months. Most campuses already face overloaded calendars for IT and infrastructure upgrades extending years, not months, into the future. And budgets are tighter than ever.

One can only hope that this reality will be made clear to the DOE by campuses during the current comment period. However, considering the resistance of many to comment thus far -- and the apparent fear of the DOE by many campus administrators -- this may not occur in mass. It will certainly be stressed after regulations are finalized, assuming they require campuses to reengineer, but the die will already have been cast.

Likely, a multi-year grace period would be necessary to enable campuses time to comply. Such a period is common when regulations impose major changes, but I have not heard of any such period to this point.

The only immediate advice would be to start conversations internally to outline potential strategies, but don’t jump prematurely.

[pullquote]Ironically, the DOE’s push to eliminate student fees may well result in even more. Monthly account maintenance fees are a likely result for many student account holders using these providers.[/pullquote]

Looking backward

Ironically, the DOE’s push to eliminate student fees associated with the disbursement of excess Title IV financial aid dollars may well result in even more student fees.

For those that choose to continue offering the service, it seems likely that both T1 and T2 providers will institute new fees. Monthly account maintenance fees are a likely result for many student account holders using these providers.

If the regulations pass as proposed, the biggest impact on campuses will be the migration from T1. These providers will likely be forced to introduce or raise fees charged to campuses that opt to continue using the T1 service.

This will force campuses across the country – possibly 50% or more of all institutions – to consider bringing their excess financial aid disbursement processes back in house. But this is not a simple process. They would need to reengineer, re-staff and re-learn a process that for many years has been successfully outsourced to the benefit of the institution, students and taxpayers.

The DOE regulation, while perhaps well intended on the surface, runs contrary to major trends modernizing both higher education and corporate enterprise. It sets campus administration and student service backward at least 15 years. It discourages use of modern system and process architectures such as outsourcing, shared application deployment and open payment system integration.

Sadly, students will likely spend more money to have an account and payment card – a must have not only on the modern college campus but also in the modern world – than they have in the years prior to this regulatory action.

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