As college students head back to school, universities and their financial partners will be operating under a new set of rules implemented by the U.S. Department of Education (DOE) that are intended to correct what the government cited as "troubling practices in the campus card market."
After tuition and fees are deducted from a student loan or grant, the excess funds, intended to cover other costs such as living expenses and books, are made available to the student. The handling of these "refunds," as they are called, was the target of the practices cited by the government in which a third party service provider offers students cash cards to park the excess funds.
It's a potentially lucrative market. The largest players in campus financial transactions entered into marketing agreements with schools eager to get out of the expense of managing disbursements and, in some cases, receiving payments from the card company. DOE estimates that of the more than $130 billion in federal student aid given out as either grants or loans, about $25 billion goes to students enrolled at schools with debit or prepaid card agreements. Colleges with such agreements represent 40 percent of the entire college population, according to the DOE.
Among the practices cited by the government were aggressive marketing of cash card services and high fees. Some card companies, using student information provided by schools, reportedly mailed a preapproved cash card in the student's name, presenting it as the preferred way student aid funds could be disbursed. These cards often came with hidden fees, such as a $0.50 transaction fee each time a card was swiped and high overdraft fees. Many also provided limited no-fee ATM access, making cash withdrawals expensive and difficult. A study by Consumers Union estimated that high-use card holders could incur more than $250 per year in fees.
Under the new rules, which apply to institutions receiving federal financial aid, schools must provide students with a neutral list of options to receive student aid refunds, including direct deposit into a preexisting bank account. Schools cannot require a student to open an account or use one particular method to receive payment. Electronic payments made to a student's preexisting account must be as timely and convenient as payments made to accounts marketed through the institution. Schools also must ensure that students are not charged "excessive and confusing fees" and they have meaningful access to no-fee ATMs for on-campus accounts. Card companies must also obtain permission from a student or parents before issuing a card in the student's name or linking an account to the student's campus ID card.
"Students have a menu of options, easy to choose, and shouldn't be pushed into opening a new account," said Suzanne Martindale, staff attorney for Consumers Union, summarizing the changes. She said that under existing federal law students already have the right to choose how they receive disbursements and those choices should be "convenient."
She recommends that as a first option, students should consider using an existing bank account to manage their money on campus, particularly if they do not have a large number of debit card transactions and have convenient access to an in-network, no-fee ATM. If the on-campus card option is more convenient, she urges students and parents to investigate the terms of the card, understand the fees associated with it, and how it will be used by the student. She also suggested asking the school what arrangements it has with the card provider. For example, does the school have a revenue sharing arrangement where they get paid if a student uses the card?
"Schools are not very good at disclosing" marketing agreements, Martindale said. The DOE has called for greater transparency and will start publishing details on the revenue that schools receive from these agreements, but not until 2017.
Higher One, a Connecticut-based company, was the leader in loan refund disbursements, with more than 50 percent market share, according to Consumers Union. Earlier this year, in a settlement with the FDIC and Federal Reserve Bank, Higher One agreed to pay $55 million in "customer restitution" for what the company described as "violations related to our activities with both a former and current bank partner and our marketing and disclosure practices." It sold off its loan disbursement businesses and was acquired by Blackboard Inc., an educational technology company. Higher One still provides a variety of payment services to colleges and universities under the CASHnet name.
This is the latest controversy surrounding financial services marketed on campus. Before the financial crisis in 2008, incoming freshmen were offered gifts to sign up for credit cards, even without a co-signer or a documented source of income. The 2009 Credit Card Accountability and Disclosure Act put an end to such practices, and the number of credit card joint marketing agreements between universities and financial institutions has steadily declined since then.
Brad Allen is a freelance journalist and former investor relations executive for companies including Imation Corp. and Cray Research. His e-mail is brad@bdallen.com.
