Recent criticism of the proposed student aid prepaid card from the Office of Federal Student Aid raised questions about the FSA mandate and possible overreach in the student loan market. The federal student aid administrator hopes to “reshape” its services to improve the experiences of students and limit abuse of the student loan system; however, consumer advocates are worried about some of the finer points in the proposed changes to the FSA’s programs.

Using prepaid cards to distribute student aid is a troubling development according to Justin Draeger, CEO/President of the National Association of Student Financial Aid Administrators. “It does raise questions,” said Draeger during recent remarks to the press.

He questions whether FSA should reach beyond its stated mission of disbursing aid and servicing student loans. For instance, the prepaid cards will see the FSA function much like a traditional bank. Other critics of the program worry that the transaction data could be sold to private interests or the government could restrict (or fail to restrict) certain categories of purchases.

Other government benefits with prepaid cards (such as EBT or SNAP) have similar restrictions on buying some items such as alcohol and tobacco. It’s not hard to imagine that taxpayers would be reluctant to pay for cigarettes and beer using funds earmarked for higher education. It’s up to the FSA to manage the balance between control and freedom of its cardholders’ behaviors.

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Looking for ways to find this balance, the FSA plans to launch a mobile app alongside the prepaid student aid cards. College students often suffer from a lack of financial literacy, so the FSA app would offer coaching, tips, and payment reminders to help students. Using data collection and research, the FSA hopes to improve their client services and help students with financial planning and the implications of excess spending.

Furthermore, Senate Democrats expressed concerns over some of the details in the proposed prepaid card program. Protections for students and detailed information on the rollout are an important sticking point. A statement from the Democrats noted that “history shows that in the absence of strict oversight and safeguards, these card programs can leave students and taxpayers vulnerable to exploitation.”

To protect students, some Democrats envision a role for the Consumer Financial Protection Bureau in the rollout and policy planning for the prepaid card program. The agency has yet to comment on their participation, declining to answer questions so far.