Over 9 million students are at risk for increased educational debt, due to bank-affiliated student debit cards that come with high fees, insufficient consumer protections, and few options. Financial institutions now have affinity partnerships with almost 900 campuses nationwide, grafting bank products onto student IDs and other campus cards to become the primary recipient of billions in federal financial aid to distribute to students.
“Campus debit cards are wolves in sheep’s clothing,” observed Rich Williams, U.S. PIRG Higher Education Advocate and co-author of the report,The Campus Debit Card Trap, recently released by the U.S. Public Interest Research Group Education Fund, in a prepared statement. “Students think they can access their dollars freely, but instead their aid is being eaten up in fees.”
The report finds that banks and financial firms now control or influence federal financial aid disbursement to over 9 million students by linking checking accounts and prepaid debit cards to student IDs. For decades, students would receive their aid by check, without being charged any fees to access their student aid. Now, students end up paying big fees on their student aid, including per-swipe fees of $0.50, inactivity fees of $10 or more after 6 months, overdraft fees of up to $38 and plenty more. Financial institutions aggressively market or default students into their bank accounts to maximize these fees.
A well-structured debit card program can provide benefits to students, but many current programs provide little to no choice, while high fees on grant and loan money leave students in deeper debt.
“Every penny of financial aid money should go to educational expenses, not an education in high bank fees,” said Williams.
Additional findings from the report include:
1) Millions of students are affected. Almost 900 of the 7,300 campuses participating in the federal financial aid program now have a banking partnership. Higher One, the biggest financial firm, has partnerships with 520 colleges that enroll 4.3 million students. Currently 12.5%, or 1 in 8, of all federal aid recipients nationally disburse their aid money into a Higher One OneAccount. Wells Fargo, the biggest bank in the market, partners with 43 campuses that enroll over 2 million students.
Many of the country’s largest colleges already have agreements. Currently, 32 of the 50 largest public 4-year universities, 26 of the largest 50 community colleges, and 6 of the largest 20 private not-for-profit schools have debit or prepaid card contracts with a bank or a financial firm, according to U.S. PIRG Education Fund research.
2) There is big money at stake. The biggest firm in the business, Higher One, makes 80% of its revenues by siphoning fees from student aid disbursement cards, totaling $142.5 million of its $176.3 million total revenues in 2011, according to SEC filings. These fees include ATM and other transaction fees, overdraft fees, and interchange fees imposed on merchants who accept cards.
3) The most-impacted students are among the neediest. Students most reliant on financial aid come from low and moderate income backgrounds. Roughly 40% of freshmen are first-generation college students, and 25% of all students are both first generation and low income.
4) The service appears to be endorsed by the colleges. Huntington Bank paid $25 million to co-brand and link their checking accounts with Ohio State University student IDs. Other schools receive substantial payouts, revenue sharing deals, and large reductions in administrative costs.
“Many bank contracts require aid recipients to visit their website before they choose how to receive their aid – into an existing account, on a check or on a disbursement card — they co-brand with the college which implies an endorsement,” added Williams. These relationships create at least the appearance of a conflict of interest, as schools may be tempted to choose the arrangement that gives them the most money rather than the arrangement that gives their students the best deal.
“The campus debit card marketplace is tilted so that students can’t get a fair deal,” said Ed Mierzwinski, report co-author and U.S. PIRG Consumer Program Director. “Campus administrations and policy makers have the power to clean it up.” Mierzwinski also urged the Consumer Financial Protection Bureau to upgrade consumer protections on prepaid cards.