Some students are paying more in checking account overdraft fees assessed to their college-branded checking accounts than they pay for books, according to a report issued this week by the Center for Responsible Lending. And they are using financial aid funds to pay those fees, the advocacy group says.
The CRL report comes as the Consumer Financial Protection Bureau is advocating for new disclosures that would make it easier for schools and students to compare fees on college-branded debit cards that have become popular on campuses around the country.
Many schools disburse financial aid on the cards, giving partner banks a captive audience for new customers. A prior study found a 70 to 80 percent take-up rate for students receiving financial aid with a partnership in place. But the schools, which often profit from the partnerships, are failing to bargain aggressively on behalf of students, according to CRL. Many co-branded checking accounts and debit cards have higher fees than products available in the open market, the group says.
Debit card college partnerships have exploded in popularity since the financial reforms passed in 2009 essentially kicked co-branded credit cards off campus. The new rules didn’t address debit cards, however, so many banks have focused their attention there.
Many co-branded debit cards allow students to incur overdraft fees totaling more than $100 per day. The fees can include cascading fees that hit accounts when debit card purchases are made that send a student’s balance below $0.
The Consumer Financial Protection Bureau says 11 percent of young adults are hit with an average of 19 overdraft fees each year. That group pays an estimated $710 annually, according to CRL, more than the average of $655 spent on textbooks each year.
When financial aid funds are disbursed on the cards, the money in the account is fair game for banks to collect the fees.
“What this means is that financial aid dollars are being diverted from educational uses to pay bank fees,” said Leslie Parrish, deputy director of research and co-author of the report. “So in a sense, overdraft fees are a loan on a loan – a loan from the bank financed by a student loan. This is a cycle that’s abusive, that costs young people dearly, and that can easily be remedied by more responsible financial products.”
In January, the Consumer Financial Protection Bureau released what it called a “Safe Student Account Scorecard” that would get schools and banks to clearly explain their financial arrangements and the fees students might face. Some schools, for example, receive a portion of the fee income generated through debit card partnerships. The scorecard is voluntary, however; the CFPB does not have authority to regulate college debit cards.
So the CRL is calling on schools to negotiate better deals for students.
“Schools are failing to take full advantage of their bargaining power to best serve the interests of their students,” said Maura Dundon, senior policy analyst and another co-author. “Colleges have a responsibility to ensure the safety of their students – and this should include financial safety as well. Ensuring that the products marketed on campus reflect students’ best interests falls well within the scope of that crucial responsibility.”
What should you or your student do?
Because of the way financial aid is disbursed, it is convenient for many students to use the school co-branded accounts, though it’s important to note that students can opt out of the programs, use their own accounts, and receive their funds via paper check. Ideally, whatever account is chosen is opened before the student sets foot on campus, and selected by shopping around and comparing ATM access, fees and other important features.
Those who do opt to use debit cards to receive their financial aid would do well to keep use of that account exclusively for basic school costs, like tuition and books, and maintain a separate checking account and debit card for everyday expenses and income. Mingling big financial aid payments with small everyday coffee purchases is the kind of account “velocity” that makes for budget confusion, and also helps banks rack up the fees.
Want to learn more about hidden fees and other Gotchas? Visit the “Gotcha” section of Bob Sullivan’s website.