By Ylan Q. Mui
Washington Post Staff Writer
Monday, October 4, 2010; A1
Soon after they arrived on campus, more than a million college students across the country received a welcome letter and a plastic card bearing a MasterCard logo from a little-known company called Higher One:
"Meet your new best friend on campus," the letter reads. A school's emblem is featured in the letterhead - and even on the card - and students are urged to activate their accounts quickly.
This is not a credit card offer. Instead, it is a new type of plastic that allows students to easily access money from their college loans everywhere from the bookstore to the bar with the swipe of a card. These cards, however, are not subject to the broad new regulations that took effect this year and sought to curtail similar relationships between colleges and credit card issuers. Meanwhile, students complain that the loan cards are riddled with high fees, and they have organized protests at several campuses.
"That's really just not the best thing to be doing with our financial aid," said Shane Gerbert, who helped lead the campaign against Higher One at the University of North Dakota. "They're siphoning it away little by little."
But college officials contend that the loan cards make life much easier for administrators and students, and that they can provide an extra bit of income for cash-strapped schools.
"Sometimes people are looking for evil intent where there is none," said Anne Gross, legislative affairs director for the National Association of College and University Business Officers.
Students often take out college loans worth more than the cost of tuition so they can pay for books, housing and living expenses. Schools are responsible for distributing the difference, often resulting in long lines of grumpy students waiting for their checks in front of the bursar's office.
Enter Higher One, which offers to take over that cumbersome process for colleges. The company also sets up accounts for students where the loans are deposited. Once activated, Higher One's product acts as a debit card, allowing students access to loan money left over after tuition.
But sometimes, even those who don't receive financial aid are urged to sign up, just in case. At some schools, the loan cards double as IDs, ensuring that every student on campus has one.
That's the case at Portland State University. School officials say students must carry the cards but aren't required to activate the Higher One account. Yet a majority who have student loans do so anyway.
"You pretty much went to go take your [ID] picture and in the mail you receive these cards and it gives you directions to activate it," said senior Natalia Grozina. "When it's a rule, you don't have the option of not having it."
Complaints about the loan cards offered by Higher One and other firms echo the outcry over marketing techniques and fees by credit card companies that prompted Congress to pass dramatic industry reforms last year.
Higher One charges students a $19 monthly penalty for accounts that aren't used for nine months, a practice now banned for credit cards. On its Web site, rival PNC Bank tells schools that setting up tables on campus to market its product to students may be required for a successful program - this is another tactic that was restricted under the credit card law. The legislation also requires colleges to submit their contracts with credit card companies to the Federal Reserve, which must issue a public report. Loan cards are not included.
More broadly, consumer groups say the cards raise questions about the ties between colleges and corporations, especially because many of the cards prominently display the logos of both. Some colleges receive a portion of the fees generated by the cards, though Higher One said it has discontinued the practice for schools that sign up now.
"Colleges save money, true. But are they completely evaluating the impact on their students?" said Ed Mierzwinski, head of the consumer program at U.S. PIRG, an advocacy group.
The business model has translated into booming sales for Connecticut-based Higher One. Its loan cards have yet to be widely adopted in the Washington area, but the company has signed up 675 colleges across the country. Higher One raised $124 million by selling stock publicly this summer, and sales in its most recent quarter reached $27 million, more than double from a year ago.
More than three-quarters of that money came from the fees it charges merchants and students. Higher One chief executive Dean Hatton told investors last month that the success of the business depends on signing up as many students as possible.
Several large banks also have begun moving into the growing sector. This spring, Citigroup inked a deal with the City University of New York to create a similar program using prepaid cards. PNC declined to give details about its loan card business.
Higher One says it is not coercing students to use its cards. Students can opt to receive their loans by check or through another bank, though they must go through Higher One's site to make their selection. On average, nearly half of students at each college sign up for the Higher One account, the company said. At schools that have used the program for several years, the adoption rate is closer to 70 percent.
"We want to make students understand there are options," Higher One spokesman Don Smith said.
Schools say the program helps students get access to their loans more quickly and conveniently. Some college administrators say many of their students do not have bank accounts and, before Higher One came along, relied on expensive check cashers to access their loans.
But students say several of the fees associated with Higher One's card are particularly irksome, including the $19 inactivity fee, a 50-cent charge for using a PIN to make a purchase rather than a signature, and a $2.50 fee for using other banks' ATMs. A Facebook campaign against Higher One at the University of North Dakota had more than 300 members.
Higher One said that only 1 percent of customers have been charged an inactivity fee and that more than half are charged the 50-cent fee only once. All fees are listed on Higher One's Web site, along with tips on avoiding them.
"We have a big effort with educating students on how to use the account," Smith said. "We're very passionate about financial literacy."
Some schools are taking a hard look at Higher One after students and faculty complained. At Pace University in New York, which uses a combo ID and loan card, some were concerned that the cards looked like advertisements. Others worried about flashing what looked like a credit card when they hung them around their necks.
At the University of Maryland's Baltimore campus, the only college in the Washington area that uses Higher One, administrator Judith Archambault said the school is careful about how it promotes the cards. At orientation, staff members inform students that they can receive loan refunds by check or direct deposit before mentioning Higher One's debit card.
"We also didn't want it to feel like we were endorsing a particular bank," she said.
Still, the school must warn students not to throw away the card even though it may look like junk mail - especially since it carries a $20 replacement fee.
"The Refund Card mailing may look like an unwanted credit card offer," the school's Web site reads. "PLEASE DO NOT DISCARD IT."