Last month, the Consumer Financial Protection Bureau, or CFPB, held a hearing regarding banking practices on college campuses. The hearing specifically targeted the growing practice of financial institutions partnering with colleges and universities to offer debit cards to students.
The cards are often set up to allow students to access their financial aid without lining up at the bursar’s office for a check. But the convenience of these debit cards comes with a catch. The financial institutions that offer them often charge high fees, which the students are rarely aware of until it’s too late. The card issuer throws up all sorts of barriers to make it difficult for the student to close the account and have their financial aid sent elsewhere — such as to an account at a bank that offers lower
The company that dominates the student debit card market is Higher One. The University of Houston has been its client since 2001. Most of those giving testimony at the hearing singled out Higher One for engaging in unfair and deceptive practices.
Houston radio station KUHF reported that in his testimony at the hearing, one student liaison described a case brought against Higher One and another financial institution last year by the Federal Deposit Insurance Corporation, saying, “The FDIC found that Higher One and the Bancorp Bank were charging student account holders multiple insufficient fund fees from a single merchant transaction. This allowed these accounts to remain in an overdrawn status over long periods of time, multiplying the insufficient funds fees that would be accrued.”
In a settlement of the charges, the FDIC ordered Higher One to reimburse $11 million to roughly 60,000 students. When it comes to Higher One, literally their entire revenue model is fee-based.
U.S. PIRG, a consumer group, published an industry study last year, alleging Higher One derives a whopping 80% of its revenue from fees on account holders.
Many students around the country use loans and other financial aid to help pay for college. Increasingly, colleges are not sending the money directly to students. Instead, they’re outsourcing that job to companies that transfer the funds to students.
When students use cards, such as those issued by Higher One, make purchases, each debit transaction can cost 50 cents if a student is paying with financial aid money.
The charges aren’t just for books. Use another bank’s ATM? That costs $2.50. Use an international ATM? That costs $5.
A spokeswoman for Higher One, Shoba Lemoine, told KUHF that the company is straight forward with students. It has already eliminated some fees.
At UH, the vice president of finance Carl Carlucci says the university can’t offer banking services for free. That’s why they contract it out.
Carlucci admits it’s not a “great solution” and that some firms may have taken advantage of students. Going forward, he says UH will encourage students to bring their own bank to campus.
Still, others say students need more protection.
A spokesperson for US Public Interest Research Groups says low income and first generation students are especially vulnerable.
“In the absence of strong rules or laws in terms of student banking, student governments are really the only lines of defense for student consumers across the country right now.”
Another solution is students can request their financial aid the old fashioned way — with a check. Or they can have the funds deposited at their own bank.
Higher One denied U.S. PIRG’s claims regarding its revenue sources. But it refused to say how much of that revenue derived from such fees, only that it was “less than 50%.”
The CFPB is only one arm of the federal government that’s investigating practices in the student debit card industry. The Department of Education set up the rules governing the disbursement of financial aid via debit cards. Mark Kantrowitz, senior vice president of Edvisors.com, which tracks student loan products, says Congress is taking a fresh look at these regulations because of large volumes of student complaints and concern even by members of Congress that the purpose of federal student aid is to help the students pay for their college costs, not to enrich third party companies.
Senate Majority Whip Richard Durbin is now leading a congressional inquiry into the campus debit card industry.
Late last month, he sent out a letter demanding a full accounting of fees collected from student debit cards for the last three academic years. The letter went out to the heads of nine major financial institutions — including Miles Lasater, president and CEO of Higher One.