Bank debit cards take a bite out of student financial aid

A recent report by the U.S. Public Interest Research Group Education Fund finds that more and more colleges are signing contracts with banks and financial institutions to disburse federal financial loans, grants and scholarships through prepaid or debit cards. The report finds that even though these cards offer quicker access to cash (as opposed to a check in the mail), in many cases students end up paying high fees for using the cards and for ATM, overdraft and inactivity charges.

According to the report, 900 out of 7,300 campuses participating in the federal financial aid program have a banking partnership, and more than 700 use the cards to distribute financial aid. Among the schools that have agreements with financial institutions are 32 of the country's 50 largest four-year public schools, 26 of the top 50 community colleges and six of the top 20 private not-for-profit schools.

Due to dwindling funding from states and loss of traditional sources of funding, schools are aggressively recruiting and outsourcing financial functions to banks and other firms to lower costs. According to the U.S. PIRG's study, Ohio State University will receive $25 million in payments over the next 15 years from an agreement with Huntington Bank. The bank will open branches and ATMs on campus and offer financial services to students, faculty, staff and alumni.

Banks and other financial institutions are going even further – taking advantage of partnerships with colleges and universities to link banking services to student ID cards. The biggest firm in the business is Higher One, and it makes 80 percent of its revenues through fees from aid-disbursement cards.

Other key findings include:

• More than 9 million students, or more than 42% of students nationwide, use pre-paid and debit cards to access their financial aid.
• Financial firms tout that of 70 to 80 percent of students use the cards, after only a few years of marketing.
• Of the banks, US Bank has the most card agreements: 52 campuses with more than 1.7 million students. Wells Fargo has card agreements at schools with the most students: 43 campuses with more than 2 million students.
• Higher One has card agreements with 520 campuses that enroll more than 4.3 million students.
• According to U.S. PIRG, at least one fee listed on Higher One's fee schedule would violate U.S. Department of Education rules if charged, and other fees may violate rules as well.
• Potentially aggressive marketing tactics can make students captive customers.
• Access to student financial aid funds placed on debit cards can be subject to limited fee-free ATMs, despite U.S. Department of Education rules. What this means is students end up paying fees to access their aid through other ATMs.
• Some practices, such as outsourcing of student ID functions and pre-loading of disbursement cards, raise privacy issues.

The U.S. PIRG report recommends:

• Elimination of fees for "financial aid disbursement cards."
• Increased transparency of financial contracts between firms and schools and tracking and scrutinizing of these contracts.
• Supervision of key players in the marketplace and enforcement action if needed to make sure laws are followed and that students receive adequate protection under the higher education and financial services laws

– George Awuor