These Debit Cards Are Bad News
Last month, the U.S. PIRG Education Fund (link opens PDF file) released a report taking aim at a new, distasteful trend: colleges and financial institutions combining forces to enrich themselves at the expense of students looking for a convenient method to access their financial aid.
But wait, you say. Haven't I heard this story before? It is true that these institutions have, for many years, taken advantage of a young, captive audience in order to make money. As a recent editorial in TheNew York Times notes, it was only four years ago that legislators finally put a stop to the practice of banks paying schools to funnel students through their doors. Shortly thereafter, banks were slapped again for pushing credit cards onto students ill equipped to deal with them.
Enter the debit card, a new, popular, and often little-regulated financial product with so many possibilities. According to U.S. PIRG, there are nearly 900 of these college-bank alliances whereby students are issued school-branded ID cards that double as debit cards with which they may access their loan money. Colleges can make millions of dollars over many years by participating in these partnerships, and banks enjoy a customer retention rate of 75% after students use their cards during their college years.
For students, the benefits are fewer, and the disadvantages often outweigh them altogether. According to one of the study's authors, about 700 of the 900 contracts provide students with debit cards that access their checking accounts, while the other 200 provide prepaid debit cards. Inactivity, swipe, overdraft, and ATM fees, as well as charges to reload prepaid cards, can add up quickly. The real kicker is that students are often using borrowed money -- in the form of student loans -- to pay these fees.
School partnerships are turning into a veritable gold mine for the biggest players in this field. The report cites US Bancorp (NYS: USB) , Wells Fargo (NYS: WFC) , and PNC Bank (NYS: PNC) as leading the way among traditional banks, while Higher One Holdings (NYS: ONE) and Sallie Mae top the non-bank list. Higher One holds the most contracts at 520, allowing it to reach over 4 million students. Wells Fargo leads the banks with access to more than 2 million prospective customers, while US Bank has the most school partnerships, and markets to a total student population of 1.76 million.
Both colleges and banks say they need additional revenue, and these alliances bring in big bucks for both parties. Florida State University's contract with SunTrust (NYS: STI) , for example, gives the bank an annual payment equal to 1.2% of the average monthly balance on FSU student debit card balances, while the bank pays the university $18,000 annually to market the program. The school also takes a cut of each foreign ATM transaction.
Earlier this month, two Democratic senators asked the Consumer Financial Protection Bureau to look into these practices. But some college representatives defend the use of debit cards. For instance, PNC and the University of Pennsylvania deny that the system they've agreed to use charges exorbitant fees to students.
Overall, it seems obvious that these contracts need to be made more transparent, as well as more amenable to students. The study notes, for example, that schools should be negotiating fees away, rather than saddling students with them. Students shouldn't be expected to subsidize colleges and banks with their loan money. It's just bad business.
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The article These Debit Cards Are Bad News originally appeared on Fool.com.Fool contributorAmanda Alixowns no shares in the companies mentioned above. The Motley Fool owns shares of Higher One Holdings, Wells Fargo, and PNC Financial, and has created a covered strangle position in Wells Fargo.Motley Fool newsletter serviceshave recommended buying shares of Wells Fargo. The Motley Fool has adisclosure policy. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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