The cards offer a simple way for students to manage their money, without the threat of running up debt that could ruin their credit. If your child has $5 on a prepaid card, he only has $5 to spend, unless you’re feeling generous and send some money to add to the card.
Yet all prepaid cards are not made equally, some come with all sorts of fees — charges to load money, activate the card, speak to customer service or check the balance at an ATM — that could eat into the cash on the card. And while the financial risks of a prepaid card are lower than a credit card, so are the consumer protections.
There are no federal laws that say prepaid card issuers have to disclose the full terms and fees on the cards. Nor are there limits to the fees they can charge. And unlike the debit card you get with a checking account, some prepaid debit cards are not backed by the Federal Deposit Insurance Corp., which covers up to $250,000. That means if your kid loses the card, your kid loses the money.
These days, however, the most onerous terms on prepaid cards are more the exception than the rule. The entrance of more companies into the market, especially big banks like JPMorgan Chase and American Express, has driven down costs and pushed out some of the worst actors in the space.
“The landscape has become much more consumer friendly,” said Greg McBride, senior financial analyst at Bankrate.com. “There are a number of low-fee card options that have come into the marketplace, much more transparent fee structures. Many cards have just one, flat monthly fee, which is much better than the prepaid cards from years past.”
Nearly a quarter of college students in the United States own a prepaid debit card, according to Javelin Strategy & Research. Prepaid debit cards have become a $5 billion industry that has experienced almost 30 percent annual growth in the past five years, according to the research firm IBIS World.
There are even 107 colleges, according to Javelin, that offer their own branded prepaid card, a practice that has gotten many in trouble with the government. Regulators worry that schools are giving students biased information about products issued by financial firms that pay colleges to promote their cards.
The Credit Card Accountability, Responsibility and Disclosure Act of 2009 forced credit card companies to disclose contracts with colleges, but the law does not extend to checking account, debit and prepaid card agreements. The Department of Education is in the midst of figuring out whether to rein in these campus cards, but in the meantime, parents should read over the terms of all financial products before signing up. And weigh what would work best for your kid.
“You have to know your child. If they’re responsible, maybe a credit card is a better way to go. They can establish credit, build some financial responsibility,” McBride said. “On the other hand, a prepaid card can be advantageous in instances where the child has the tendency to overdraw a checking account or run up credit card debt.”