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Why Durbin’s Right to Question Student Debit

June 12, 2012
Personal Finance
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Last week, Senator Dick Durbin (D-IL, of Durbin Amendment fame) and Representative George Miller (D-CA), wrote to the CFPB and Education Department officials asking them to investigate financial agreements between universities and companies that disburse financial aid payments. And they’re right to: If the disbursement company Higher One is any example, student debit cards bring both conflicts of interest and high fees.

What is financial aid disbursement?

If a student receives financial aid in excess of his tuition, he’s entitled to receive the balance. This occurs most often in community colleges, where tuition is substantially lower. Traditionally, schools would have to issue check refunds, facing high costs and pressing deadlines. Into this market step financial aid disbursement companies. For a fee, they will refund the student’s excess tuition (for example, on a debit card). Their fee saves the university money and headache in handing out refunds, and the company collects revenue from interchange fees and from students on top of their service charge.

Why Durbin and Miller are wary

In their letter to Richard Cordray, director of the CFPB, and Kathleen Tighe, inspector general of the Department of Education, the congressmen cited concerns including:

  • ATM fees, including balance inquiry and out-of-network withdrawal fees;
  • Per-transaction fees;
  • Few on-campus ATMs, leading students to incur out-of-network fees; and
  • Affiliate relationships with universities that are not properly disclosed.

They well should be. As NerdWallet reported last year, one major financial aid disbursement company, Higher One, earns significant revenue from cardholder fees. Here’s Higher One, by the numbers:

  • Revenue
    • $44: Higher One’s average fee revenue per student per year (NerdWallet analysis of H1’s financial reporting)
    • 0.1%: In 2009, Higher One agreed to pay Southern Oregon University 0.1% of students’ transaction volume – incentivizing the university to pay their students with H1 cards, and to have their students keep using them
  • Services
    • 520: Campuses using Higher One
    • 600: Approximate number of Higher One ATMs across the entire country
  • Fees:
    • $0.50: OneAccount’s PIN transaction fee.
      • Note that many students – and others – do not know that they can choose “sign” at the register rather than enter their PIN.
    • $2.50: The OneAccount’s out-of-network ATM fee, which doesn’t include ATM owner surcharges
      • Note that the only way to withdraw cash for free is to use a Higher One ATM, which are few and far between. There is an out-of-network ATM fee, and a PIN transaction fee should the student try to get cash back at a store.
    • $10: H1 charges an inactivity fee of up to $10 if the account is dormant for six months or more
    • H1’s full fee schedule

Student debit cards represent a guiding principle: There is no free lunch. For universities, services like Higher One’s are a great value proposition. Generally, disbursing excess financial aid costs $20 per student, according to a Higher One spokeswoman. Higher one, on the other hand, charges only $44 – and that’s before revenue-sharing agreements. But in this case, what’s best for the university isn’t necessarily what’s best for the student.

Products are sold to inexperienced and trusting students

Though often-incurred fees for basic services are troubling, perhaps equally so are the shrouded fees that sneak up on the student. Take, for example, the North Carolina State-U.S. Bank WolfPack Card that functions as a student ID and a debit card. It charges:

  • $1 for an ATM decline
  • $1 for a card-to-card transfer
  • $1 for a non-U.S. Bank credit or debit card transfer
  • $2 per month of inactivity, triggered after 6 months
  • $15 to receive the remaining funds by check when you close the account

These semi-hidden fees are often problematic. Either people don’t realize that they’re charged, or they don’t understand what activities incur fees. Students, too, can be especially vulnerable to the belief that non-standard use fees will never apply to them.

The Credit CARD Act of 2009 banned banks from marketing credit cards on campus. That didn’t stop them from marketing checking accounts, of course. But an exclusive arrangement with a financial institution that shifts costs from the school to the students seems to be even more of a violation of the law’s spirit.

Durbin and Miller call for regulation and transparency

Our position on prepaid debit cards is that fairly and transparently priced products can serve a valuable place in the financial system. Clarity and education are even more important when students are involved, and most of all when it’s a trusted institution that’s promoting the card. To that end, we applaud Durbin and Miller’s calls for the CFPB and Department of Education to investigate:

  • What the fees are, and how much the average student pays,
  • Whether there are adequate student protections on the card,
  • If universities face a conflict of interest and whether the relationship is properly disclosed, and possibly most importantly:
  • Whether students are “sufficiently aware of all features of the financial products…and are given sufficient opportunity to opt out of them.”

While better financial aid disbursement systems may eventually help both students and universities, this won’t happen until we have a transparent dialogue between students and schools, banks and regulators.