Critics: Banks Unfairly Profit Off Student Aid Debit Cards

Some students complained small fees linked to their financial aid debit cards cost them more than $1,000.

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Some say colleges and financial firms unfairly profit off debit cards that are in part intended to help students access financial aid funds.

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While many of the fees associated with college debit cards are not out of line with the mainstream banking world, according to a new government report, critics claim small fees tied to the cards unfairly allow colleges and financial firms to profit off a system that in part aims to give students easier access to their financial aid funds. 

Millions of students across the country each year are offered the option to receive their financial aid through debit cards provided by their colleges and universities, often in partnership with a private bank or financial firm, according to a report released by the Government Accountability Office Thursday. The report calls for expanded oversight of the system and urges increased transparency around the agreements between colleges and financial firms, and says schools should offer students more neutral information about their options for accessing financial aid funds. 

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"From a student point of view, there just should be no additional fees attached to getting your aid," says Christine Lindstrom, higher education program director for the U.S. Public Interest Research Group. "In all honesty, I just think that is wrong. It used to be that students could get their financial aid for free. They still can, although they get pushed into a system that makes money off of them."

The GAO report found that of 7,600 colleges and universities participating in financial aid programs, about 852, or 11 percent, had debit card agreements. Although the total enrollment in different college card programs is not known, the schools identified as having such programs represented about 40 percent of all college students in America, the report says. 

While these cards can be used for different purposes – such as serving as a prepaid card or a student ID card – more than 80 percent also serve as the account through which the college disburses a student's financial aid. Although ultimately students decide where the school should send their financial aid money, the report found schools did not present the cards in a neutral way and may have influenced students into signing up for them, even when it may not have been in a student's best interest. 

"One provider, on a website on which students can select a method to receive financial aid and other payments, displays an option where students can immediately select the provider’s account," the report says. "However, students who want to select other options must work through additional instructions, in which the provider continues to encourage use of its product."

Lindstrom says in other cases, schools will tell students that if they sign up for the debit card they can immediately access their financial aid funds, whereas if they choose to have their funds disbursed to a third-party bank, it could take up to two weeks to access the money. 

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"The entire kind of pipeline to get the student into the account exemplifies push marketing," Lindstrom says. "You haven’t opted in, you haven’t opted out, you haven’t even set foot on campus and yet the card comes to you in the mail. That alone gives you a sense that you should be doing this."

In public comments sent to the Consumer Financial Protection Bureau (CFPB), some students said they felt pressured to sign up for the college-sponsored debit cards. Additionally, although the cumulative amount of fees students incur on average is not reported, the GAO says in its report that some students complained of paying aggregate fees that ranged from hundreds of dollars to more than $1,000. 

Two fees Lindstrom says were particularly egregious were associated with the PIN students use to access their funds and overdraft fees. Although the college card is called a debit card, to avoid a $0.50 transaction fee, students would have to sign for their transactions as they would with a credit card. 

"Obviously that is very confusing," Lindstrom says. "You’re giving them a debit card but expecting them to behave with it as if it were a credit card, and it ensnares students into the transaction fee."

In response to the report, Brenda Dann-Messier, acting assistant secretary of postsecondary education in the Department of Education, said the department is committed to the "continued development of policies and rules that help ensure efficient, convenient, and fair access to federal student aid, including through college debit cards." 

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She said many of the issues brought up in the GAO report will be addressed through a negotiated rule-making session, which is scheduled to run from Feb. 19 through April 25. 

Rohit Chopra, student loan ombudsman at the CFPB, said since the enactment of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (CARD Act), partnerships between colleges and financial firms have shifted from credit card agreements to debit card agreements.

The legislation was intended to protect young adults from predatory practices among some credit card companies. Since it took effect in February 2010, it has been illegal to issue a credit card to anyone under the age of 21, unless that person has a co-signer or can submit evidence of an independent ability to pay the bills. It also significantly limited the marketing practices of credit card companies on college campuses. 

Still, the GAO report found it's not just the financial firms, but also some colleges that are making profits off the cards, either based on the number of card accounts or number of transactions. 

"Revenue-sharing agreements appear to be declining, but concerns remain that the payments and other benefits schools receive from card providers may motivate schools to encourage the use of college cards or potentially choose the arrangement that provides the schools the most revenue rather than one that provides students the best terms, according to federal officials and consumer advocates," the report says.

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Lindstrom says the enactment of the CARD Act, in addition to then-New York Attorney General Andrew Cuomo's exhaustive investigation into agreements between colleges and private student loan lenders in 2007 and 2008, caused a "gravitational pull towards this approach to getting into student wallets." 

"There's been a huge push by banks and others to sort of move more and more aggressively into this space," she says. "[Private loans were] no longer an avenue available to them, then credit cards were no longer an avenue available to them, and so now we’re seeing them all gravitate towards the debit card space."