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College debit cards: Hidden costs of convenience

As the skyrocketing cost of a college education makes headlines across the country, a new controversy is brewing over college debit cards. Banks and universities tout the convenience but some consumer advocates warn of higher banking fees. One education expert compared the practice to "wolves in sheep's clothing."

Debit cards are the hot financial product on college campuses across the country. Millions of students will return to school and access their financial aid via a debit card. Schools see it as a more efficient, convenient way to distribute financial aid. 

Anne Gross, vice president of regulatory affairs for the National Association of College and University Business Officers, calls paper checks “dinosaurs” that are expensive for schools to process, harder for students to use and potentially less secure. 

“A low-income student without a bank account, faced with a paper check, is going to go to a check cashing storefront and lose 10 percent right off the top. And then they’re going to have a pocket full of cash to deal with,” Gross told me. “To my mind, that’s the worst option.” 

It all makes sense, but critics say there are some potential pitfalls that need to be considered. 

“We’re concerned that campus debit cards might actually be wolves in sheep’s clothing,” said Rich Williams, higher education advocate with The U.S. Public Interest Research Group (U.S. PIRG). "They’re pitched as a free way to get student aid, but as students quickly find out their aid is being eaten up in fees.” 

Potential charges include swipe fees, overdraft fees, even inactivity fees. 

In May, Higher One president Miles Lasater told the New Haven Independent that half the company’s revenue comes from student fees. Based on the firm’s 2011 filing with the SEC that would be about $88 million dollars. 

Earlier this month, Higher One and its partner The Bancorp Bank of Wilmington, Del., settled charges of alleged unfair and deceptive practices brought by the Federal Deposit Insurance Corporation.  The two companies have not admitted doing anything wrong, but they will refund approximately $11 million to 60,000 students who were charged excess fees on their student debit card accounts. 

Debit cards linked to student ID cards

Hundreds of colleges and universities now make it possible for students to use their campus ID cards as debit cards. This service is normally provided by a bank or financial institution that has paid the school for direct access to its students. This debit card feature can be used by any student – even those who are not getting financial aid – to open a bank account. 

Why are banks so interested in landing these student accounts? Because they know that relationship is likely to last well past graduation. 

In a recent report, “The Campus Debit Card Trap,” U.S. PIRG says financial institutions now have partnerships with almost 900 colleges and universities nationwide. These schools have a combined enrollment of more than 9 million students, 42 percent of all students in the U.S. 

These deals can be lucrative for schools. In its report, U.S. PIRG says it obtained a contract between Huntington Bank and Ohio State University that shows the bank will pay the school $25 million over the next 15 years. In return, the bank gets the right to co-brand and link its checking accounts with student IDs. 

“It isn’t like that money is doing something underhanded,” noted Anne Gross with the National Association of College and University Business Officers. “Anything a school can do to raise other funds is less money that the students have to cover.”

“It may be efficient, but is it in the best interests of students?” asks Frank Palmasani, a veteran high school guidance counselor and creator of the Financial Fit program on  “When it comes to paying for college everything works against families.”

Consumer advocates also worry that students will think a school-endorsed debit card has been vetted to make sure it offers them a good deal. But that may not be the case. It could simply be a business relationship. 

“While the account might be better than what a student can find off-campus, it also might not,” said Williams. “We have a real concern about this, because it gives the bank almost a monopoly on campus and an unprecedented opportunity to cross-sell potentially dangerous financial products, such as credit cards.” 

In a statement to NBC, Steve Kenneally, vice president of regulatory compliance at the American Bankers Association, pointed out that no university, college or bank can require students to accept their financial aid through a designated bank account or debit card. 

“Students can – and should – compare prices and features of bank accounts and debit cards just as they do for laptops and smart phones, and select the bank products that best meet their needs,” he wrote.  

The bottom line

Just last week, the Consumer Financial Protection Bureau (CFPB) issued an advisory to students expecting to receive scholarships and student loans:

  • You can’t be required to use a specific bank or card. There may be a financial institution that operates on your campus, but you generally can’t be required to use a specific account or card to access your student aid. If you have received a federal student loan, your school must provide a paper check or cash option.
  • Consider choosing an account before arriving at school. Shop around, and don’t feel limited by the banks operating ATMs on or near campus. Some financial institutions don’t charge you for using any ATMs, and some will automatically reimburse you for fees charged for using an out-of-network ATM. Many institutions also provide a mobile phone app to remotely deposit paper checks.
  • If your school offers it, sign up for direct deposit as soon as possible. If your school offers direct deposit, you may be able to provide the school with your account information in order to access your funds more quickly.

The CFPB wants students who have an unresolved problem with their student checking account to file a complaint. If you want to just share your experience with student checking accounts and debit cards, you can tell the CFPB your story and use the tag “financial aid.”

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