Millions of students headed to college for the fall semester have an important financial decision to make: how to access the extra spending money in their financial aid accounts.
Students who receive financial aid typically have a credit balance - money left over after the school deducts tuition and fees. The school needs a way to distribute this money so students can spend it on living expenses.
To reduce their processing costs and make money - sometimes millions in marketing fees - many colleges have signed deals with companies that offer incoming students a quick and simple way to get their financial aid money via debit or prepaid cards.
"Students were steered into opening these accounts, and in some cases, had the impression they had to open these accounts — that this was the only real choice to get their money right away — and that pitch was deceptive," said Suzanne Martindale, staff attorney at Consumers Union, the advocacy arm of Consumer Reports. "Unfortunately, it was only after signing up for these accounts that students realized, on the back end, that there were high or unusual fees."
With some of these campus cards, students got dinged with a 50 cent fee every time they made a PIN purchase with their card. Others gave students only one or two ATMs to get cash without paying a high service fee, and those ATMs could have long lines when money was deposited to the cards.
"A lot of these accounts were nickel-and-diming these kids out of their financial aid money," Martindale told NBC News. "This really adds up over time, especially if that's the main card you use to make all kinds of purchases on or around campus."
"A lot of these accounts were nickel-and-diming these kids out of their financial aid money."
This year, new federal rules protect students from aggressive and unfair marketing of banking products linked to their financial aid. The new regulations, which took effect in July, specifically prohibit colleges and universities from steering students to specific bank accounts.
Eliminating Common Abuses
The Department of Education said its new rule will eliminate "troubling practices" that have been taking place on many campuses and enable students to "freely choose" how to receive their federal student aid. Schools must provide "objective and neutral information" about financial aid disbursement options and students can no longer "be forced to pay excessive fees" to access their aid money.
Lauren Saunders, associate director at the National Consumer Law Center, calls the new rule "a definite win" for college students and their families because it stops many abusive practices.
"These companies pay a lot of money to schools to promote their accounts and unfortunately, that was leading colleges to push these accounts on their students when they really weren't the best things for those students," Saunders said. "The new rule requires schools to give students the choice of where they receive their financial aid money and they can get it into their own account if they want — which is usually going to be the best choice."
If a student chooses an account offered by a company involved in disbursing financial aid funds for the school, there are limits on allowable fees. That account cannot have overdraft fees, fees for opening the account, balance inquiry fees or point-of-sale fees. The financial institution is required to have a reasonable number of ATMs where the student can get cash without fees.
NOTE: More limited protections apply to other campus-affiliated bank products marketed to students that are not used to disburse financial aid.
The new regulations still allow colleges and universities to enter into marketing agreements with outside companies to provide federal aid distribution. But now, schools will have to post information about those relationships and what the contracts say. In September of 2017, schools will also be required to disclose how much they get paid for these marketing opportunities.
Need a Bank Account?
More than half the students headed to college already have a bank account, according to the Consumer Financial Protection Bureau (CFPB). For those who do, the smart move is to sign up to have their financial aid deposited to that account, financial experts tell NBC News. Students who find a better account once they're on campus can always switch.
Remember: Just because a banking product has the school's endorsement or logo attached to it, doesn't mean it has lower fees or better features.
On its website, the CFPB advises new students to look closely at college-sponsored bank accounts and shop around. The Bureau notes that a report by the Government Accountability Office found that many college-sponsored accounts were no better than what students could find themselves after shopping around — and in fact, were sometimes worse.
The financial website NerdWallet recently looked at university-affiliated checking accounts at 20 of the largest schools in the country and found much better alternatives.
"While it's easy to think that the best account is the one that your university seems to endorse through one of these partnerships," said Devan Goldstein, NerdWallet's banking expert. "It's highly likely you'll be able to find a better and cheaper product somewhere else."
NerdWallet recommends Simple, the online bank based in Portland, Oregon and Capital One's 360 online checking. The key reason: They don't have a monthly maintenance fee and they don't have overdraft fees. If you try to spend more than you have in the account, the transaction is declined.
"Students tend to overdraft more than any other age group," Goldstein noted. "And those overdraft fees at $35 a pop, can really add up."
The Consumer Financial Protection Bureau has information on its website - Student Banking 101 - to help young people open their first bank account.