GAO urges changes in college-provided debit cards
By Martin Merzer
They are pushing debit card arrangements that are once again great for banks and great for colleges, but can be terrible for students.
|-- Rep. George Miller
Ranking member, U.S. House Education Committee
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:
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."
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.
U.S. PIRG's education program director
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:
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.