Last month, the U.S. PIRG Education Fund (link opens PDF file)
released a report taking aim at a new, distasteful trend:
colleges and financial institutions combining forces to enrich
themselves at the expense of students looking for a convenient
method to access their financial aid.
But wait, you say. Haven't I heard this story before? It is
true that these institutions have, for many years, taken
advantage of a young, captive audience in order to make money. As
a recent editorial in
The
New York Times
notes, it was only four years ago that legislators finally put a
stop to the practice of banks paying schools to funnel students
through their doors. Shortly thereafter, banks were slapped again
for
pushing credit cards onto students ill equipped
to deal with them
.
Enter the
debit card
, a new, popular, and often little-regulated financial product
with so many possibilities. According to U.S. PIRG, there are
nearly 900 of these college-bank alliances whereby students are
issued school-branded ID cards that double as debit cards with
which they may access their loan money. Colleges can make
millions of dollars over many years by participating in these
partnerships, and banks enjoy a customer retention rate of 75%
after students use their cards during their college years.
For students, the benefits are fewer, and the disadvantages
often outweigh them altogether. According to one of the study's
authors, about 700 of the 900 contracts provide students with
debit cards that access their checking accounts, while the other
200 provide prepaid debit cards. Inactivity, swipe, overdraft,
and ATM fees, as well as charges to reload prepaid cards, can add
up quickly. The real kicker is that students are often using
borrowed money -- in the form of student loans -- to pay these
fees.
School partnerships are turning into a veritable gold mine for
the biggest players in this field. The report cites
US Bancorp
(
USB
) ,
Wells Fargo
(
WFC
) , and
PNC Bank
(
PNC
) as leading the way among traditional banks, while
Higher One Holdings
(
ONE
) and
Sallie Mae
top the non-bank list. Higher One holds the most contracts at
520, allowing it to reach over 4 million students. Wells Fargo
leads the banks with access to more than 2 million prospective
customers, while US Bank has the most school partnerships, and
markets to a total student population of 1.76 million.
Fool's take
Both colleges and banks say they need additional revenue, and
these alliances bring in big bucks for both parties. Florida
State University's contract with
SunTrust
(
STI
) , for example, gives the bank an annual payment equal to 1.2%
of the average monthly balance on FSU student debit card
balances, while the bank pays the university $18,000 annually to
market the program. The school also takes a cut of each foreign
ATM transaction.
Earlier this month, two Democratic senators asked the Consumer
Financial Protection Bureau to look into these practices. But
some college representatives defend the use of debit cards. For
instance, PNC and the University of Pennsylvania deny that the
system they've agreed to use charges exorbitant fees to
students.
Overall, it seems obvious that these contracts need to be made
more transparent, as well as more amenable to students. The study
notes, for example, that schools should be negotiating fees away,
rather than saddling students with them. Students shouldn't be
expected to subsidize colleges and banks with their loan money.
It's just bad business.
The popularity of debit cards points to how many customers are
using less-traditional methods of banking these days. The
explosion of mobile banking has brought
one particular company
to the forefront of the
the next trillion-dollar revolution
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Fool contributor
Amanda Alix
owns no shares in the companies mentioned above. The Motley
Fool owns shares of Higher One Holdings, Wells Fargo, and PNC
Financial, and has created a covered strangle position in Wells
Fargo.
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