The Department of Education plans to offer students a prepaid card to hold their excess loan money. The Office of Federal Student Aid hopes to launch the pilot program in late spring. Up to 100,000 students from four different schools will be given the opportunity to opt-in and receive the prepaid card. According to the department, the card gives borrowers access to a unique product unlike anything else currently being offered on the market.
The card would allow both the government and financial services to see how borrowers are using the funds they borrow.
Keep in mind this prepaid card isn’t going to hold the entire loan disbursement – just the surplus funds. When students receive a loan that surpasses their tuition, the excess funds will go onto the prepaid card (currently, the norm is to deposit these funds into a borrower’s bank account). Students can use those prepaid cards to pay for books, rent, and other living expenses, but they could also spend it on clothes.
Borrowers might occasionally receive a text message regarding their spending choices after using the prepaid card. The text messages are meant to offer students a form of financial counseling that they might not otherwise have access to. The department stated that this would help borrowers gain a better understanding of their spending and use of their student loan money.
The pilot program is part of a long-term plan by the department to update the way they issue loans and collect payments from borrowers. Students would be given access to the myStudentAid mobile app where students and their parents could fill out a FAFSA and have immediate access to their loan information.
However, some consumer advocates took a less optimistic view of the prepaid card, arguing that it is overly invasive.
They voiced concerns about how the data on the students’ spending habits will be used. There is also the question of whether the card will provide financial institutions the opportunity to take advantage of vulnerable students.
Other consumer advocates are concerned about whether the department would have the authority to restrict the spending of borrowers using the card.
Senator Richard J. Durbin joined with other senators to write a letter to the chief operating officer at the Federal Student Aid Office, Wayne Johnson. The letter requested that Johnson provide more extensive details regarding the card and expressed the need for strict oversight to ensure students are not taken advantage of.
Overall, it remains to be seen whether this prepaid card will help or hinder the overall student loan debt situation.
Author: Mike Brown
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