The Department of Education’s proposed amendments to the \”Cash Management\” rules governing financial-aid disbursements may soon put a stop to a clear misuse of the federal student-aid system: college-bank partnerships that, among other things, steer students into high-fee bank accounts. And it’s about time. The comment period for this important rule change ends today, July 2.
These partnerships give banks extensive marketing access to students; in return, colleges receive financial benefits from the bank — a share of the fee revenue, or a bonus per account opened, for example. What is supposed to be a fee-free way for students to receive their loans and grants has been turned into a marketing opportunity for banks.
Colleges and universities are supposed to be trusted financial intermediaries in the financial-aid system. They draw down their students’ grants and loans from the government and disburse any money left over after tuition to the student. Because disbursement is complicated, some colleges outsource it to a third-party company and its bank partners. They may also outsource their student-ID process to a bank, with the ID card doubling as a debit card for a bank account, and the college receiving a bounty for each student who signs up.
The college may then get additional payments to encourage students to deposit future financial-aid disbursements into such accounts — and it may have the contractual obligation to do so. Students may be led to believe they have no other way to receive their financial-aid money in a timely manner, or they may think the college has selected a good account on their behalf because it is branded with the college logo or is advertised during new-student orientation.
Throughout what is essentially a sales and marketing process, students may well believe that their college has used its market power and knowledge to seek out the best accounts on their behalf. They don’t understand that the college may actually be paid by the bank and has an interest in increasing student bank fees and accounts, not reducing fees or finding the best accounts available.
Those sweetheart deals can mean significant new business for banks. Today 40 percent of college students in the country attend a college that has a bank partnership. Bank accounts are \”sticky\”; that is, consumers tend to stick with one bank over time. Since college students tend to be younger, with a lot of earnings potential and bank deposits ahead of them, the economics are clear: The college receives a cut of the money, and the banks receive exclusive access to a captive audience of prime customers.
Some banks like to claim that the deals help students find affordable accounts. But our report, \”Overdraft U,\” found that costs associated with student checking accounts — especially overdraft fees on ATMs and debit-card purchases — are worse than other options on the market today. Overdraft fees, in particular, can skim off hundreds of dollars of their aid money. These are essentially \”junk fees\” that take advantage of consumers: $35-a-pop charges that often exceed the value of the intended purchase and could have been avoided at little or no cost to the bank or consumer.
To make matters worse, banks may deliberately alter the sequence of transactions in a day to maximize the number of overdraft fees. Other fees, like ATM fees if the bank does not have sufficient ATMs on a campus, or \”swipe fees\” for point-of-sale transactions, can also add up quickly.
Better accounts are available with no overdraft fees and plenty of features that might be attractive to students. But the deceptive marketing practices and exclusive college-bank deals suppress potentially healthy competition. Since a college’s partner bank gets to students first, and is allowed to engage in unfair marketing practices to lure them into opening accounts, other banks and financial-service providers never have a chance.
Those practices unfairly effect the students least able to afford it. Many community colleges have bank partnerships, and their students are probably more likely to have refunds — and those refunds are likely to be larger.
Admirably, some colleges understand that they should be helping their students succeed with their student-loan investments. Janet Napolitano, president of the University of California system, told the Consumer Financial Protection Bureau that her institution has a \”general philosophy\” against using administrative systems to profit at the expense of students. She warned that college-bank partnerships may render students \”involuntarily beholden\” to banks, and cautioned especially against any form of credit — including overdraft fees — on student accounts.
California’s principled views stand in sharp contrast to an administrator at a Midwestern community college, who urged the Education Department not to limit college-bank partnerships. In his view, students should be held \”accountable for their banking missteps.\” But multiple regulators have found that banks engage in unfair and deceptive practices when marketing those accounts to students and imposing overdraft fees — so students never have the chance to learn accountability for \”missteps\” they cannot prevent. Rather, the students are set up to make missteps by the bank and their college.
Instead of selling banks exclusive marketing access to their students, colleges should be doing the reverse: impartially helping students identify the best accounts on the market. The Department of Education’s proposed rules are a partial step toward that goal. Administrators could also turn to Consumer Reports and the Consumer Financial Protection Bureau to better evaluate accounts. In no case should colleges receive payouts or discounted services for steering students to a particular financial institution.
If third-party disbursement services become too expensive when colleges have to bear their true costs because they are no longer a cross-marketing platform for bank accounts, then it’s time for the Department of Education to directly disburse credit balances to students, rather than keeping in place a system that benefits banks and colleges — at the expense of students.
Author Bio: Maura Dundon is a senior policy counsel at the Center for Responsible Lending, a nonprofit, nonpartisan organization.