U.S. lawmakers probe banks' debit card deals with colleges

By Elvina Nawaguna

WASHINGTON, Sept 27 (Reuters) - Democratic U.S. lawmakers are demanding to know whether U.S. banks paid money or gave gifts to college officials to set up student debit card programs that the legislators say are "fee laden" and inflate education costs.

Through these programs, the banks provide students with deposit accounts or debit cards to access their scholarship funds and student loans.

At least one bank working with legislators has said it does not think the debit card programs are beneficial to students and believes they should be cut back.

In a letter dated Sept. 26 the lawmakers said they fear such financial deals could open up students to exploitation through "fee-laden" debit cards that could raise the cost of their education and push students deeper into debt.

They also said they were concerned these arrangements could lead to abuse of the federal student loan system with funds being diverted to benefit the banks and the colleges.

The letter was sent to Wells Fargo, US Bancorp , PNC Financial Services Group, SunTrust Banks , TCF Bank, Citigroup, Huntington Bancshares, Commerce Bancshares, and Higher One Holdings.

The lawmakers include Representative George Miller, the senior Democrat on the House Education and the Workforce Committee; Senator Dick Durbin, the assistant Senate majority leader; and Senator Elizabeth Warren, a member of the Senate Banking Committee.

They demanded that the banks provide lists of institutions with which they have such agreements, information on how many accounts the banks have opened, the fees collected over the last three academic years, and what the colleges were paid in return.

"At a time when college costs are increasing and college students are drowning in debt, the federal government must ensure the integrity of student financial aid programs and step in if financial aid dollars are being diverted through deceptive or predatory practices," the letter said.

A spokesman for Wells Fargo said the bank looked forward to providing the requested information.

Higher One said that it has been working directly with several congressional offices and has already shared much of the information requested.

"We don't believe this model prioritizes the student's best interests and we are completely committed to this practice diminishing," Higher One's spokeswoman Shoba Lemoine said.

The other banks either declined to comment or did not immediately respond to Reuters requests for comment.

In a May 2012 report, the U.S. Public Interest Research Groups, a collection of non-profit advocacy groups, expressed concerns about the aggressive marketing involved in these agreements and weaker protections for the students.

The group found nearly 900 card partnerships between colleges and financial institutions at the time and that students were subject to extra fees including per-swipe fees, inactivity and overdraft fees.

The Consumer Bankers Association said in a statement that those kinds of relationships can provide value to both the colleges and the students and often provide "low-cost, high-convenience financial products" tailored to the students' needs, and that banks are obligated to be transparent in such dealings.