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Report: Consumer Protection
The Campus Debit Card Trap
Summary and Key Findings:
Banks and other financial firms are taking advantage of a variety of opportunities to form partnerships with colleges and universities to produce campus student ID cards and to offer student aid disbursements on debit or prepaid cards. In addition to on-campus services, such as student ID functions offered on the card, some cards offer traditional debit card services linked to bank accounts; other cards provide additional reloadable prepaid card functions. The disbursement of financial aid and university refunds is the most significant partnership identified.
While schools are obtaining revenues and reducing costs by outsourcing certain services, the relationships between schools and financial institutions have raised questions because students end up bearing some costs directly – including per-swipe fees, inactivity fees, overdraft fees and more. Other issues include the effect of aggressive marketing strategies by partnering companies on student choice and weaker consumer protections on certain cards that hold student aid funds.
For example, students are not necessarily making their financial choices freely. When the college has selected a student ID vendor that “incidentally” offers additional banking services on the college-mascot-embellished card, the student’s choices are limited and the student is under the presumption that the college endorses the provider.
Inquiries into the privatization of government benefits through the use of prepaid cards in other sectors, such as state unemployment benefits, have suggested that transparency of terms and fees, as well as contracts, leads to governments making better deals, with fewer fees, for their clients. .
This U.S PIRG Education Fund report is an overview of the campus card marketplace and includes a survey of campus cards at the 50 largest public universities, 50 largest community colleges, and 20 largest private universities by campus population. It recommends best practices by colleges and banks and new protections for consumers, and provides tips for students. Greater transparency will help make the market work better.
U.S. PIRG has identified almost 900 card partnerships between colleges and banks or other financial firms at schools with over 9 million students, or over 2 in 5 (42%) of all students nationwide.
Industry leading banks and financial firms tout that upwards of 70%-80% of students use their cards after a few years of marketing.
U.S. PIRG has identified that 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 had debit or prepaid card contracts with a bank or a financial firm.
Of banks, US Bank had the most card agreements, at 52 campuses with over 1.7 million students. Wells Fargo had card agreements at schools with the most students; its contracts were at 43 campuses that have over 2 million students.
The largest financial firm player, Higher One, has card agreements with 520 campuses that enroll over 4.3 million students.
Although contracts are hard to obtain, revenues to schools can be substantial. A new contract between Ohio State University and Huntington Bank includes $25 million in payments to the school over 15 years. It also includes an additional $100 million in lending and investment to neighborhoods surrounding campus.
Fees can be steep and frequent for students using the university-adopted cards, including a variety of per-swipe fees, inactivity fees, overdraft fees, ATM fees and fees to reload prepaid cards.
At least one fee listed on Higher One’s fee schedule would violate U.S. Department of Education rules if charged, other fees may violate other rules.
Potentially aggressive marketing tactics can make students captive customers.
Access to student financial aid funds placed on debit cards can be subject to limited availability of “convenient” fee-free ATMs for student loan withdrawals despite U.S. of Education rules. Students end up paying fees to access their aid.
Debit card contracts have been controversial at some campuses.
Some practices, such as outsourcing of student ID functions and pre-loading of disbursement cards, raise privacy issues.
Based on our evaluation of issues surrounding the growing campus card marketplace and their potential impact on students, we make detailed recommendations at the end of this report, to campuses, to banks and financial firms and to regulators, including the following:
Campus Card Best Practices
To ensure that students are benefiting from a campus debit card program, campus debit cards should adhere to the following best practices:
1. Students Should Have An Unbiased Choice of Where to Bank. The bank account you get as a student may continue with you for decades. Such an important choice shouldn’t be skewed by which financial institution gave the school the most money. For financial aid disbursements, campuses should provide students a diverse set of disbursement options that clearly include the ability to use their own existing bank account and ability to choose to receive a check.
2. Low Fees. Colleges should negotiate away fees that students incur on their debit cards as well as make it easier for student debit card consumers to avoid fees. Fees should not be charged to financial aid funds. A specific list of fees that should be eliminated appears below under “Key Recommendations for Campuses.”
3. Safe Checking Fees. For accounts not related to federal student aid, student checking accounts should meet the minimum requirements of the FDIC Model Safe Accounts Template, modified to address the needs of students. Fees on student accounts should be reasonable and proportional to services rendered and all fees should be disclosed prominently on the bank’s website, mailers and other materials.
4. Unrestricted Access to Funds. Campuses should provide, and regulators should require, an adequate number of regularly-replenished on-campus ATMs for financial aid disbursement. ATM deployment measurements should be based on need during peak-use times, such as the beginning of a semester or quarter.
5. Strong Consumer Protections. Given the public’s perception that a debit card is a debit card (whether or not it is prepaid), colleges should insist that all campus debit cards carry the same level of consumer protections extended to ATM debit card customers under the Electronic Funds Transfer Act. Appendix 2 goes into more detail on differences in consumer protections between various cards.
6. No Push Marketing. The marketing surrounding these cards may result in a student being pushed into a product or an agreement that isn’t best suited for his or her needs. Given that the campus debit card has already been chosen by the college, providing an implicit endorsement, there must be strong rules to avoid push marketing. Students should not be subjected to branding and advertising by banks and financial companies unless they affirmatively opt in. Students should be able to opt in or out of the university-sponsored debit card program through the campus itself, rather than making the option through provider sponsored venues such as a provider website.
7. No Conflict of Interest. Many schools engaged in partnerships with banks or financial firms can receive large financial incentives, which at least create the appearance of a conflict of interest. Contracts should be disclosed so that the public knows that the school chose the debit card program that gives students the best deal rather than the one that gave the college the most money.
Key Recommendations for Policymakers
To ensure that students are protected within a campus debit card program, regulators can make the following changes to federal rules that define the market:
1. Eliminate fees for financial aid disbursement cards. Policymakers should update federal regulations that govern disbursement of federal student aid to ensure that high banking fees are not charged to students who can afford them the least.
2. Increase transparency and tracking. Policymakers should collect more data on debit card practices on campus to better understand the market. Policymakers should extend important transparency provisions for credit card contractual relationships included in the Credit CARD Act and the Higher Education Act to any debit card contracts on campus.
3. Enforce the laws and the rules. The Consumer Financial Protection Bureau, other bank regulators and the Department of Education should, as appropriate, supervise key players in the marketplace and use enforcement action if needed to make sure firms comply with the laws and that students receive every protection afforded to them under the higher education and financial services laws.
4. Other Recommendations. In the recommendations section of this report, U.S. PIRG Education Fund provides a more detailed list of regulatory changes that policy makers can pursue, as well as tips for students who must navigate the muddy waters of the campus debit card marketplace.
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