Students Lose When Financial Aid Goes Onto Fee-Laden Debit Cards

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Thought the student loan crisis was bad as it is? Now add hefty fees into that mix. Providers say students can avoid the fees that pile up when they elect to receive their financial aid on a debit card, but new research from a consumer advocacy group finds that these companies throw up roadblocks to keep the fee revenue rolling in, even as colleges make big bucks off their affiliations with these institutions. 
U.S. PIRG found that more than half of U.S. community colleges and four-year public universities have contracts with banks or other financial service providers to offer students debit or prepaid cards. The study identifies 900 different partnerships that affect 9 million, or two in every five, students around the country. The largest player, a non-bank financial company called Higher One, has card agreements with 520 campuses encompassing 4.3 million students.

(MORE: 60 and Still Not Out of Student Loan Debt: Seniors Facing $36 Billion in College Loans)

These deals aren’t necessarily a bad thing in and of themselves; colleges are under intense budgetary pressure, so outsourcing some of the administrative and clerical work needed to manage student financial aid disbursements helps keep their costs down. But PIRG expresses concern that schools aren’t generally up-front about the deals they make and the compensation they receive for partnering with a financial institution.

If a student gets a debit card in the mail with the school logo, they’re liable to think that the card and the account are sanctioned by the school. They’re not going to immediately assume, “Oh, this is the bank that offered my school the most money to issue us debit cards.” When it comes to banks, students are likelier to stick with that institution even after they graduate because switching banks is such a hassle. Ideally, they’d be able to select a bank and an account based on their own needs. PIRG says the school should be looking out for students’ best interests, not their own bottom lines.

But in reality, the study says that’s what happens. Although colleges and banks tend to keep their contracts pretty close to the vest, the report offered one telling example. In a contract with Ohio State University, Huntington Bank agreed to pay the school $25 million over 15 years, plus lend and invest up to $100 million more in the area around the campus.

This is big money, and PIRG contends too much of this is being earned at students’ expense.

Although it’s possible for students today to get financial aid via a paper check or direct-deposited into another bank account, study co-author Rich Williams says some institutions make it deliberately difficult for them to do so. Getting a paper check may require a wait of as long as a couple of weeks, a time frame that simply isn’t an option for many students, especially those who are lower-income. To get funds direct-deposited, students might find that they have to jump through hoops like filling out forms by hand and finding a place where they can send them via fax in order for their request to be processed.

(MORE: 6 Common Misconceptions About Financial Aid)

Roughly 700 of the 900 partnerships are for debit cards attached to a checking account; the remainder are prepaid debit cards, Williams says. Although prepaid debit fees have gotten a lot of attention lately (including from the Consumer Financial Protection Bureau), some of the conventional debit cards are just as bad. Multiplying the impact is the fact that some of this financial aid comes in the form of loans, which means students are paying interest on the money they’re forking over in fees.

In some cases, students are charged 50 cents every time they use their cards to make a PIN-based purchase at a retailer — an amount that can multiply quickly if the card is their primary access point to their money. Williams says a student pays an average of $5 each time they use a non-partner ATM to access their funds. Higher One, although it serves 520 campuses, only has 600 ATMs that are fee-free for students to use. If these machines break down or run out of money — which happens before lunchtime on some days right after aid funds are deposited onto the cards — students who need their money right away have no choice but to pay that roughly $5 surcharge — about half of which goes to Higher One.

One study conducted by a consulting firm on behalf of Higher One found that students paid an average of $49 in fees each year. Yes, students come to college to learn, but they shouldn’t have to learn the hard way that debit fees can be an expensive sinkhole.

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