Higher One Turns Financial Aid Into Big Business

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While students struggle to pay rising tuition costs, many are also facing a tough lesson in personal finance courtesy of cost-cutting universities and Higher One Holdings Inc., a company that provides student financial aid refunds.

Founded in 2000, Higher One now serves over 700 colleges nationwide. Over the past year, student accounts have risen by 31% to around 2 million students. Higher One acknowledges that Regulation E amendments limiting insufficient funds fees have slowed them down a bit this past year. Still, the company made the bulk of their earnings from account revenue, an umbrella category that includes interchange fees charged to retailers, as well as a plethora of fees levied on the students who use their products.

Yep, Higher One makes much of its money from banking fees, effectively taking millions of dollars of financial aid from the pockets of the poorest college students. When a student receives aid in excess of tuition, it’s refunded to him. That’s where Higher One comes in, acting as a financial aid clearinghouse.

Universities pass the buck

In days of old (before the early 2000s), schools handled the process of disbursing financial aid funds to students, sending them a check or depositing funds into student accounts. But in an effort to cut costs, an increasing number of colleges and universities are paying Higher One to disburse funds. According to Shoba Lemoine, who handles media relations at Higher One, each paper check that a school issues can cost upwards of $20. By contrast, Higher One charges around 44 cents per disbursement for direct deposit or paper checks.

The company mails out debit cards to each student, who is then responsible for going online to select a reimbursement method. Although they still have the option of receiving a paper check or having the money deposited in a preexisting personal account, many students choose a OneAccount. It’s a free-if-you’re-careful checking account that gives access to remaining financial aid via debit card.

While partnerships with Higher One save schools money, some are receiving additional financial benefits. In the case of a 2009 services agreement between Higher One and Southern Oregon University, Higher One agreed to credit the university “0.10% of the net transaction volume” of offline debit transactions. Come again? In layman’s terms, this means that every time a student completes an offline purchase, Higher One will credit the school a tenth of a percent of the interchange fee. In addition, Higher One agreed to credit SOU 10% of the federal funds rate multiplied by the students’ deposits into OneAccounts. Conflict of interest, anyone?

In an interview, Lemoine insisted that such agreements are not the norm and have not been written into new contracts since 2007. She acknowledged that “some legacy contracts still include [similar agreements],” but stressed that schools pay Higher One for its OneDisburse services, and that shared revenue does little more than defray the price of subscription.

Fees, fees, and more fees

Despite claims of increased convenience for students, some are finding that Higher One fees are making a big dent in the disbursed aid money. It’s impossible to say exactly how much revenue these fees represent for Higher One because fees paid by students and interchange fees from merchants fall under the same category of “Account Revenue” in Higher One’s 10Q filings.

While she can’t give any exact numbers, Lemoine says the average OneAccount holder pays less than $50 a year in fees, accounting for under half of Higher One’s total revenue. By our calculations, this means that the average student pays as much as around $45 a year in fees, a number that’s way too high for students on financial aid and approaching $90 million in revenue for Higher One.

It’s also  worth noting that the FDIC notified Higher One of its intention to recommend enforcement action against the company. The alleged violations concern “overdraft charging on persistently delinquent accounts, collections and transaction error resolution.” Lemoine wasn’t able to provide further detail on the nature of the violations, but she said Higher One voluntarily discontinued the offending practices and that FDIC recommendations aren’t uncommon in the industry.

Higher One’s fees include:

  • A first time insufficient funds fee of $29. Subsequent overdrafts cost $38.
  • 50 cents for each PIN-based transactions.
  • $2.50 for using an out-of-network ATM, on top of any fees charged by the ATM owner.
  • A $19 per month abandoned account fee for accounts that have been inactive over 9 months.

Students rack up some fees more than others. Lemoine says only 3.6% of accountholders incurred an overdraft charge so far this year, in part because Higher One doesn’t always allow transactions to go through if students lack sufficient funds. Abandoned account fees are also rare, and students receive an email warning them before they hit the 9-month mark.

PIN-based transactions are a more common pitfall for students. Past news articles have highlightedconfusion at a number of schools among students who don’t realize they can (or should) sign for debit card purchases. Likewise, Higher One ATMs are available only on campuses, so students are out of luck if they need to access cash away from school.

Higher One in context

Given all the news over increasing bank fees, is Higher One really any worse than the other options out there? We’re constantly writing about the banking fees at many big name banks, and when it comes to fees, Higher One certainly isn’t the only offender. Keep in mind, though, that Higher One stands out because it specifically targets institutions of higher learning and their most financially needy students.

While some of its fees are comparable to those charged by big banks, Higher One’s 50-cent charge on each PIN-based debit purchase is unusual and can add up quickly. While some prepaid cards have similar fees, most regular debit cards don’t.

Higher One argues that students knowingly choose the OneAccount, and that its banking fees are competitive with other options.  If a student doesn’t already have a bank account, a check cashing service is likely to cost them around 3% of the value of the check. If they do have a bank account, it may come with its own fees.

Still, it’s not hard to find banking options cheaper than Higher One. We haven’t had many positive things to say about Bank of America lately, but it’s worth noting that even this mega-bank offers a cheaper checking account than Higher One. BofA’s eBanking account is free as long as you use no physical services. They have more widely available ATMs and only charge $2 to use out-of-network ATMs.

But if BofA can compete,  credit unions leave Higher One in the dust. It’s not unusual to find CUs that offer free banking along with full service. Whatever their financial history, students need to know that they have options beyond either Higher One or big banks.

Student response

Around the country, student reactions to Higher One have been mixed. Students, held a rally this fall in protest of Higher One’s partnership with Western Washington University .

There have been similar grumblings at a North Carolina community college, where a student was briefly suspended for writing an outraged Facebook post about his school’s partnership with Higher One, and Portland State University, whose students’ protests against Higher One date back to 2004.

Lemoine says that less than 50% of eligible students choose the OneAccount, but why aren’t more steering clear of it? And why hasn’t there been more of a student uprising in response to schools partnering with a company that makes millions off banking fees deducted from student financial aid? The answer may well be that they don’t know any better.

A 2008 study by the Jump$tart Coalition for Personal Financial Literacy highlights widespread financial ignorance among young people. Many students, especially college freshmen, aren’t equipped to decide how best to receive financial aid reimbursements. Promotion of OneAccounts by schools and financial literacy programs funded by Higher One make the choice all the more confusing for students.

Given the vulnerable population they work with, Higher One’s fees are deeply troubling, as is many schools’ willingness to promote banking services that are not in students’ best interests. In the absence of regulations to limit student banking fees and rein in symbiotic relationships between Higher One and schools, there is a clear need for increased financial literacy programs to provide students with unbiased information on their banking options.