Tougher laws and more muscular regulations are required to protect millions of university and college students who are increasingly preyed upon by debit card and prepaid card providers -- and, in many cases, by their own schools, according to a new report by congressional investigators.
The most active issuers of what have become known as "college cards" are nonbank firms that can issue these debit and prepaid cards while circumventing key banking rules intended to protect students, according to the study by the U.S. Government Accountability Office.
These firms are now flooding a market left behind by credit card issuers after the 2009 Credit Card Accountability, Responsibility and Disclosure (CARD) Act cracked down on the on-campus marketing of more conventional credit cards to students.
"A growing number of colleges and universities have entered into agreements with financial firms to provide debit and prepaid card services for students," the GAO, which conducts investigations and audits for Congress, said in the report issued late last week. "As the number of agreements has grown, questions have arisen over fees and issues such as student choice."
As a consequence, the investigators said, Congress and the U.S. Department of Education should compel college card issuers, as well as universities and colleges to provide more transparency about their agreements, enhance students' ability to avoid high transaction fees, make certain that students are aware of the full range of their choices and take other steps to protect young adults who may be fiscally naive.
"Congress curbed aggressive and lucrative marketing on these products, but financial institutions are now back on campus," said U.S. Rep. George Miller, a California Democrat who had asked for the report. "They are pushing debit card arrangements that are once again great for banks and great for colleges, but can be terrible for students."
College-provided cards now common
The study found that 852 institutions -- where 40 percent of all U.S. college and university students attend classes -- offer and, in many cases, endorse and actively promote college cards, a relatively new financial instrument.
These cards, essentially school-authorized debit or prepaid cards, are offered and marketed as conduits for a large chunk of the $142 billion financial aid depended upon by 15 million U.S. college students. "In the majority of agreements," the GAO reported, "the schools ... outsourced to their card providers the process for paying financial aid and other funds via college cards and other sources." Often, tuition refunds also are loaded onto the cards.
In addition, many schools now use these reloadable debit and prepaid cards as official student identification cards, making the cards all the more necessary for students to carry. The GAO reported that 80 percent of the college cards are debit cards; the rest are prepaid cards.
Congressional investigators, other government officials, consumer advocates and many student representatives say the college cards often hit students with hefty ATM and other fees to get at their own financial aid and tuition refunds. The cards also can carry outsized overdraft charges, do not give students adequate choice in their own financial affairs and can hook young college students into a buy-now, pay-later lifestyle, critics contend.
"Data show that we already have a hard time trusting financial institutions," said Adi Redzic, a member of the college-age millennial generation and executive director of the iOme Challenge, an annual college competition intended to enhance retirement planning and financial literacy on campus. "Being taken advantage of just further erodes this trust.
"If universities, which have generally been viewed with a degree of trust and esteem, are seen as a part of the scheme, then the trust erosion can easily multiply," he said.
Many of the largest issuers of college cards are financial institutions that are exempt from key federal banking regulations. The students caught in the middle of this often come from low-income backgrounds and are the least able to afford to be drained of some of their financial aid, officials say.
"College cards may confer benefits to schools and students, but they may not be the best option for all students," the report said. "Financial markets function best when consumers are fully informed about financial products and how to choose among them."
Investigators and many critics of college cards take pains to note that the debit and prepaid cards can serve useful purposes. They make distribution of student aid and tuition refunds safe, quick and easy, taking the burden off college administrators and students, and allowing both parties to avoid long lines at a college bursar's window.
GAO report findings
These conveniences come at a cost. Among the problems cited by GAO investigators and others who have examined the issue:
- Fees. The GAO found that college card ATM fees generally are not out of line with the industry standard, but students often encounter more difficulty than other customers in finding no-fee, in-network ATMs and avoiding fee-based, out-of-network ATMs.
Regulations imposed by the U.S. Department of Education require that students have "convenient access" to an in-network ATM or a bank branch office, but the rules do not define "convenient." In some cases, only one in-network and no-fee ATM is available on or near campuses that issue college cards, investigators report. Naturally, that leads to complaints of long lines during financial aid distribution days at ATM machines -- and machines that quickly run out of cash.
As a result, some students complain about out-of-network ATM transaction fees that can add up to $5 per transaction. Students tend to run up fees by making many, relatively small withdrawals.
- Neutrality and suitability. Critics contend that many schools, by explicitly or implicitly endorsing the cards -- and by using them as identification cards -- are signaling that students have little choice in how they receive their financial aid and tuition refunds. "Concerns have arisen over some school and industry practices that can influence student options, especially when a college card is not necessarily the best option for all students ... ," the report said. "Education staff said anecdotal evidence supports that idea, noting that students are more likely to sign up for an account when the debit and ID functions are on a single card."
- Potential conflicts of interest. In some cases, investigators say, universities are collecting millions of dollars in return for teeing up their students as college card customers. "Schools may have incentives to influence student choice because some receive payments from card providers based on the number of card accounts or transactions," the GAO reported, "leading some consumer advocates to question whether schools always act in their students' best interests."
A 2012 study by U.S. PIRG, a federation of state public interest research groups, sharply criticized the practice. In one representative case, Ohio State University expected to receive $25 million over 15 years for allowing a firm to enroll its students into debit card programs, according to the U.S. PIRG study, called "The Campus Debit Card Trap."
The U.S. Consumer Financial Protection Bureau cited a deal between the PNC bank and Miami University of Ohio that paid the school $400,000 in advance and a bonus of up to $200,000 each year for recruiting students as customers for accounts that offer debit cards, student ID cards and checking accounts.
Christine Lindstrom, U.S. PIRG's education program director, said the latest GAO report demonstrates that the potential abuses still exist -- and may be spreading.
"The report also confirms that financial firms give campuses a share of the profits that these cards generate off the backs of the lowest-income students at the school," Lindstrom said. "If this isn't a campus rip-off that calls for swift and decisive action to safeguard students, then I don't know what is."
New company dominates market
The largest issuer of college cards, a nonbank firm called Higher One, was founded in 2000 and already has run into regulatory and legal difficulty.
In 2012, it signed a consent order with the Federal Deposit Insurance Corp. and agreed to pay $11 million to 60,000 students who complained about high, difficult-to-avoid fees.
Last year, Higher One settled a class-action lawsuit regarding its fees and marketing practices, denying the allegations but paying $15 million. In that case, students claimed that Higher One misled them into thinking that its debit card was the schools' preferred method of distributing financial aid, steered them into depositing funds into Higher One bank accounts and charged excessive fees
Nevertheless, Higher One remains the industry leader, with 57 percent of the college card market as measured by the number of card agreements, according to the GAO. Its name appears 47 times in the 63-page GAO report, it continues to enhance its reach through acquisitions and other actions, and it makes big bucks.
Last week, Higher One reported $211 million in revenue and earnings of $57.8 million last year. It said that its various services are used by colleges and universities that have 13 million U.S. students.
The GAO reported that, in recent years, about three-quarters of Higher One's revenue "derived from accounts opened by students and other members of the campus community, including account holder fees and interchange fees."
In other words, most of the company's revenue comes directly from the pockets of students. Higher One said that a study it commissioned found that the average holder of the company's primary OneAccount paid less than $50 a year in transaction fees.
Kyle Summerfield, a student at Merced College, a California school that is reviewing its arrangement with Higher One, recently expressed his frustration to the Modesto Bee.
"I don't understand why any institution gets to force me to do business with anybody," he told the newspaper. "But that's exactly what happened."
'Fair, valuable, fully transparent'
A Higher One spokeswoman did not respond to specific questions regarding the company's services, its past difficulties, its relationships with colleges and universities and assertions that students sometimes are hit with hefty fees. In a written statement, however, Casey McGuane, the company's chief operating officer, defended the firm's business practices.
"As the GAO noted in its report, Higher One has already made considerable changes to ensure our student account offerings are fair, valuable, fully transparent and result in students receiving their financial aid refunds quickly and in the way they want it," McGuane said. "Our services remain at the forefront of student-focused financial products."
On Friday, the company sent a summary of the GAO report to its "college clients" that highlighted the portions favorable to it. The company's summary included the investigators' comments about the cards' benefits and relatively low transaction fees, but excluded the problems also mentioned in the report.
In comments last week to stock analysts, Mark Volchek, Higher One's co-founder and chief executive, said his firm has "greatly strengthened our compliance efforts over the past year. We continue to invest additional resources to make compliance even stronger."
At the same time, Volchek said, Higher One's business prospects remain strong. "Universities and colleges always are looking for ways to reduce costs," he said.
The college card industry is relatively new. It arose after federal regulators began cracking down on another on-campus financial operation -- the turbocharged rise of so-called "affinity cards" that are endorsed by colleges and universities and often carry the schools' logos. These cards, most often traditional credit cards but also sometimes debit cards, were aggressively marketed on or near campuses, often in return for large payments by the card firms to the schools or the booster operations.
The arrangements were almost always secret until the CARD Act compelled the details, including compensation to schools, be disclosed. Once revealed, the number of credit card college agreements plummeted from 1,045 in 2009 to 617 in 2012.
Student representatives and consumer advocates cheered the trend and welcomed the change, but they began noticing that debit and prepaid card issuers were quickly filling the void. In many cases, these cards -- and the firms that issue them -- are not subject to transparency rules and other key elements of the CARD Act.
These new college card agreements are most common at public colleges and universities, the GAO found, likely due to particularly severe budget pressures at those schools. "About 29 percent of public schools had card agreements, compared with 6.5 percent of nonprofit schools and 3.5 percent of for-profit schools," the study reported.
In addition to Higher One, seven other significant providers of college cards were identified, most notably U.S. Bank, Sallie Mae, PNC and Wells Fargo.
Card issuers and their supporters say the cards can serve as an entry port for students who do not have bank accounts or access to other cards, and the firms sometimes offer financial literacy guidance to students.
Critics maintain that the companies that issue these cards -- which, again, often must be carried as student ID cards -- often use that access as a portal to a deeper and wider financial relationship with impressionable students.
Higher One, for instance, offers a variety of OneAccounts to students who attend its associated colleges and universities. The accounts, in addition to being the depositories of financial aid and tuition refunds, all feature checking accounts and a variety of fee schedules that range from no monthly fees (based on varying direct-deposit thresholds) to $5.95 a month, plus transaction fees at non-network ATMs.
"Some colleges receive discounted or even completely free services [from card issuers] in exchange for allowing a provider to market financial products to students ..." said Rohit Chopra, student loan ombudsman for the U.S. Consumer Financial Protection Bureau. "This gives the financial institution a foot in the door to generate significant revenue in fees from students, making it worthwhile to provide discounted services to schools."
In response to all of this, the GAO issued several recommendations:
- It urged Congress to require that issuers of college cards provide greater transparency of their operations by filing their college and university agreements with the Consumer Finance Protection Bureau, along with "other relevant information, such as payments between schools and the providers and fees charged to students."
- It asked the U.S. Department of Education to require schools and college card providers to present students with "objective and neutral information on their options for receiving federal student aid payments."
- It said the Department of Education also should issue a specific definition of "convenient access to ATMs or branch offices" of card issuers so "students will not incur costs in making cash withdrawals of federal student aid."
Representatives of the Department of Education said that they were meeting with representatives of all the parties involved in these issues and soon would issue new regulations.
"We are committed to the continued development of policies and rules that help ensure efficient, convenient and fair access to federal student aid, including through college debit cards," said Brenda Dann-Messier, the department's acting assistance secretary.
Redzic, the college millennial representative, said the changes are long overdue. He said schools and college card issuers are jeopardizing their reputations and long-term business prospects.
"There's money making and there's ethics," Redzic said. "Any strategy that is not transparent and that may be designed to play on naivete or that may be manipulative will inherently be short-lived. I hope that every university will review their financial agreements and policies in this regard."
Financial writer Martin Merzer has a particular interest in on-campus financial literacy and has served in the past as a judge of the annual collegiate iOme Challenge.