The U.S. Department of Education is proposing a new rule granting itself new power over how banks can work with colleges to assist with loan disbursements to students.
Under the proposed rule, banks would be prohibited from assisting colleges with financial aid disbursements into student accounts if the financial institution charges overdraft penalties or other common fees. Some schools currently outsource the disbursement process to banks, speeding up the procedure and providing students with accelerated access to financial aid funds.
‘Nanny State Gone Wild‘
Competitive Enterprise Institute Senior Fellow John Berlau says the proposed rule is unnecessary and lacks legal authority.
“I don’t see any statutory authority for the Department of Education for [regulating] banking,” Berlau said. “Basically, they think that banks are exploiting students. They’re saying that students can’t be expected to balance their budgets, and therefore you can’t charge overdraft fees. In the process, they’re denying students the opportunity to learn about saving.”
Berlau says the proposed rule is evidence “the nanny state has gone wild.
“The intent is basically to protect people from themselves,” Berlau said. “As much as they say it’s the evil banks, they’re really saying that students and other people can’t be trusted with these accounts and to balance their checkbooks, so they must be protected.”
‘Subsidize the Irresponsible‘
Berlau says overdraft fees teach responsibility to younger people.
“The assumption is that banks are exploiting you if you don’t balance your checkbook or if you have a bounced check,” Berlau said. “It used to be that you went to jail for a bounced check. Now they have this convenient feature where you just pay a penalty. Sometimes it is a little steep, but it’s in proportion. It teaches most people not to overdraft again.”
Berlau says the proposed rule will transfer money from financially responsible people to the irresponsible.
“This is forcing the responsible students and others to subsidize the irresponsible,” Berlau said. “It’s going to raise the fees for everybody [else] if we can’t charge extra fees to those who don’t do the minimal effort to balance their checkbook. Those who are irresponsible with their bank account need to pay their fair share.”
John A. Tatom, a fellow at the Johns Hopkins University Institute for Applied Economics, Global Health, and the Study of Business Enterprise, says the proposed rule illustrates the Obama administration’s disdain for free-market capitalism.
“The Department of Education does not regulate banks, but it increasingly regulates state, local, and private educational institutions to the detriment of students that it claims to protect,” Tatom said. “These proposed new rules reflect the [Obama] administration’s attitude that profits are bad, and it uses the power of its funds to force compliance with its wishes, even if it reduces opportunities for the students it claims to protect.”
Tatom says the proposed rule ignores the principle of voluntary exchange, where people engage in mutually beneficial arrangements.
“That banks might profit from these arrangements is the problem from the [Department of Education’s] perspective,” Tatom said.
“DOE aims to limit students’ opportunities to receive their loan funds in a more efficient and desirable manner that benefits them, as well as the bankers that would serve them and their universities that help arrange, distribute, and service their loans,” Tatom said.
Jeff Reynolds ([email protected]) writes from Portland, Oregon.