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.”
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