Since taking over as head of the Education Department, Secretary Betsy DeVos has been pushing for change within the Federal Student Aid (FSA) office. A recent change she’s put forth involves using a debit card called an FSA Payment Card to disburse student loan funds for borrowers.
Not only is the Department of Education looking to overhaul how students receive their student loans — Congress is too. One provision in the recently-introduced PROSPER Act calls for student loan disbursements to function more like paychecks distributed weekly, bi-weekly, or monthly, rather than a lump sum.
Here’s what you need to know about these potentially radical new changes for student loan borrowers.
How would the FSA Payment Card work?
The Education Department submitted information about the FSA Payment Card via the federal register on January 19. The pre-solicitation notice calls for a pilot program that would disburse student loan money to borrowers from participating schools using special debit cards.
Full student loan amounts wouldn’t be disbursed onto these cards. Instead, the “refund” amount the school passes on to students after tuition and fees (and on-campus housing costs, if applicable) would be added to the FSA Payment Card for use later.
Why is the Education Department proposing the FSA Payment Card?
Using FSA Payment Cards would allow the government a little more control over where students spend their money. Research indicates that some borrowers spend their excess student loan money on items such as clothing and alcohol that aren’t supposed to be purchased using federal student loan money.
A. Wayne Johnson, whom DeVos appointed to head the FSA office in June 2017, will be leading the FSA Payment Card initiative. He left his position as head of the FSA and will serve as the leader of the new Strategy and Information Office. Johnson plans for the card to partially dictate how students can spend their loan money.
“We will have controls,” Johnson told the publication Inside Higher Ed. “It will have real-time coaching for people in terms of, ‘you’re about to spend this money on this particular matter — it’s going to have this effect on your student loans.’”
Ryan Frailich, the founder of financial planning firm Deliberate Finances, expressed skepticism about the “Big Brother” aspect of the FSA payment card.
“If you believe in simplifying and getting government out of personal business, how does this get to that goal?” Frailich said. “Plus, depending on which businesses are considered ‘qualified,’ some students could end up with greater financial stress.”
Ultimately, Frailich said, “People could end up in a situation where they have money they can’t access for their needs.”
Pros and cons of receiving financial aid like a paycheck
The PROSPER Act proposes that excess federal student aid disbursements should be smaller, and made at regular intervals throughout the semester.
Mark Kantrowitz, a higher education advocate and expert, thinks this could actually be a good thing in the long run.
“About half of all undergrads run out of money mid-semester, partly due to them spending it quickly at the beginning when they have a lump sum,” Kantrowitz explained. “Spreading out the student loan money, and treating it like a paycheck, could make students less likely to run out of money.
Kantrowitz pointed to pilot programs tested a few years ago for Pell Grant recipients.
Schools like Mt. San Antonio College near Los Angeles discovered that disbursing Pell Grant money at regular intervals throughout the semester helped students budget accordingly. Not only did it reduce the number of students running out of money, but it also helped with long-term retention.
“Students were less likely to drop out because of financial problems,” Kantrowitz said.
However, the way the money is distributed does matter.
“There has to be a degree of flexibility in giving a bigger amount at the beginning of the semester,” Kantrowitz said. “Many college costs, such as books and buying a laptop, are front-loaded. Low-income students, especially, might need a little more money at the beginning and that needs to be taken into account.”
Michael Dinich, a retirement and tax advisor at Your Money Geek, described how his alma mater, Mansfield University in northern Pennsylvania, tried holding some of the excess funds until near the end of the semester. However, it didn’t work out very well for some students.
“For many people, waiting that long caused problems,” Dinich said. “They didn’t have the rent money when they needed it. Any sort of change would need to reflect when people actually pay their bills.”
How to manage your student aid money while in school
The key to making your financial aid money last is to create a plan for your money. Dinich pointed out that a student loan “refund” is often treated as a windfall by students.
Instead, student loan borrowers should consider that money in terms of how it can help cover recurring expenses.
“Figure out what your expenses will be each month during your semester,” said Dinich. “You know you need to pay rent each month if you live off campus, so earmark some of your money for rent. The same is the case for transportation to and from school, groceries, daycare, and other costs you know you’ll have throughout the semester.”
Make a budget and stick to it. While parceling out the money throughout the semester can help students stay on track, Dinich said that more financial education is needed for student borrowers.
“People that are going to do the wrong thing will figure out how to do the wrong thing no matter what the government does,” said Dinich. “What we really need are more tools for borrowers and a way to make sure we don’t burden the people who do it the right way.”
Need a student loan?Here are our top student loan lenders of 2019!
|1 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB). Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. Loan products may not be available in certain jurisdictions, and certain restrictions, limitations; and terms and conditions may apply. Ascent is a federally registered trademark of Turnstile Capital Management (TCM) and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
* Application times vary depending on the applicants ability to supply the necessary information for submission.
2 Important Disclosures for CollegeAve.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
Information advertised valid as of 2/1/2019. Variable interest rates may increase after consummation.
3 Important Disclosures for Discover.
* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
4 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
5 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
SunTrust Bank, Member FDIC. ©2019 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
6 Important Disclosures for LendKey.
Additional terms and conditions apply. For more details see LendKey
7 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
8 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|4.26% – 13.26%1||Undergraduate and Graduate|
|4.20% – 11.44%2||Undergraduate, Graduate, and Parents|
|4.84% – 13.49%3||Undergraduate and Graduate|
|4.62% – 11.47%*,4||Undergraduate and Graduate|
|4.38% – 13.38%5||Undergraduate and Graduate|
|5.85% – 6.99%6||Undergraduate and Graduate|
|3.95% – 9.81%7||Undergraduate, Graduate, and Parents|
|4.47% – 12.34%8||Undergraduate, Graduate, and Parents|