Shady Debit Card Woes for Students
NEW YORK ( MainStreet) California's Rep. George Miller, senior Democrat on the House Committee on Education, has raised the issue. The Department of Education has been thinking it through. Now the Consumer Financial Protection Bureau is looking into a practice where financial institutions have been slow to reveal their arrangements with colleges to market debit cards to students using them to draw down their federal loans.
The colleges get an additional source of revenue. Financial service providers get access to a potentially lucrative group of customers who are charged fees for using these cards.
The questions for now concern disclosure. Do students with these cards really know what's in their wallets?
"We'll be asking financial institutions about whether existing agreements are made available to students and families in a clear and conspicuous place on their company's website," wrote CFPB student loan ombudsman Rohit Chopra in a December 17 blog post on the college-card issuer tie up.
"Students and their families should know if their school, whether well-intentioned or not, is being compensated to encourage students to use a specific account or card product," Cordray said in a December 17 statement. "When financial institutions secretly give kickbacks to schools, they are engaging in risky practices." Increased CFPB scrutiny may be in the works for next year.
One the biggest providers of student debit cards is HigherOne, whose fee structure has drawn fire from student advocates and federal regulators alike. The New Haven, Ct.-based firm is settling a $15 million class action law suit brought by card holders last month.
In their complaint filed last April in U.S. District Court in Connecticut, the plaintiffs alleged that HigherOne engaged in the "unfair and unconscionable practices of automatically creating accounts for college students, depositing aid into HigherOne accounts without the students' permission, deceptively discouraging students from opting out of such accounts and accessing deceptive and unusual bank fees on student accounts." HigherOne has deals with some 500 colleges and universities. None were named in the suit.
Plaintiffs typically charged that the accounts were opened without their consent and financial aid was received on a co-branded, pre-loaded HigherOne debit card stamped with the college or university's name.
Mark Volchek, the CEO of HigherOne, said in a December 7 statement that the company was "generally in support of the open disclosure of contracts with campuses for consumers so long as the standard for disclosure is applied equally to all third-party servicers."
The Credit Card Accountability, Responsibility and Disclosure Act of 2009--the CARD Act--requires card issuers to report to the CFPB the terms and conditions of any college credit card agreement to the CFPB.
But debit cards, prepaid cards and other financial products marketed to students are not subject to the same rules as college-affiliated credit cards under the CARD Act. The number of colleges with agreements with credit card issuers has dropped by 41% between 2009 and 2012, according to the CFPB. But while credit card agreements declined, the CFPB found that financial institutions were marketing other products, like campus debit cards, that come with fewer restrictions.