More colleges are turning to student debit cards to disburse financial aid, and some of those cards are laden with fees, the Consumer Financial Protection Bureau says.
This post comes from Bob Sullivan at partner site Credit.com.
While college credit cards with bad terms may be disappearing from America’s college campuses, many are simply being replaced with debit cards that come with hidden fees and other booby traps, regulators say.
The Credit CARD Act financial reform bill passed by Congress in 2009 placed strict regulations on how credit card issuers could market their accounts on college campuses and the kinds of agreements issuers could arrange with schools. But the law did not cover debit and prepaid cards, which are often used to disburse financial aid or other college-related funds.
As they have become more popular — more colleges have debit/prepaid agreements than credit card agreements now — abuses have become more common.
The Consumer Financial Protection Bureau has announced the creation of a “Safe Student Account Scorecard” in an effort to bring more transparency to debit and prepaid cards. Schools can ask financial institutions to fill out the scorecard, which includes details on various fees and other costs. The scorecard is voluntary, because the CFPB has no authority to force it on schools or issuers.
“Financial institutions have engaged in troubling practices,” CFPB director Richard Cordray said in a media call. “More recently, both the FDIC and the Federal Reserve have identified serious illegal conduct by providers of student debit cards.”
Abuses include policies that nudge students toward repeated overdraft fees.
Rohit Chopra, who runs the CFPB’s student loan monitoring program, warned that what’s happening in the college prepaid and debit card market bears an “uncomfortable similarity” to abuses that occurred in the student loan market last decade. Students who sign up for school-branded prepaid cards often find terms that are inferior to those of similar prepaid cards on the open market.
Little data available
“You would think when colleges negotiate with financial institutions, they would get better [terms] than are generally available,” Chopra said. “We’re not finding that.”
Some schools may not know the right questions to ask of potential financial partners, Chopra said. He hoped the scorecard could be used as a negotiation tool. Scorecard responses, which will also include the financial incentives offered to the college for signing the agreement, may or may not be made public, the CFPB said.
“There is very little data available [about college debit and prepaid cards] and in some ways that’s what troubles us about this market,” he said.