On Wednesday, the Consumer Financial Protection Bureau called for public input on a scorecard that would ask banks to provide schools with a clear description of any fees being charged to students, the banks’ marketing practices, an estimate of how much banks earns from student accounts and an annual summary of fees.
Although many universities use a competitive bidding process when they select financial partners, CFPB Director Richard Cordray said schools have a difficult time comparing proposals. The contracts submitted by banks often don’t spell out the fees, for instance, that they’ll charge students with accounts.
Using the scorecard would be voluntary for schools, although the University of California has already agreed to embrace it. The CFPB is accepting comments on its proposed guidelines until March.
“Colleges have already come to us looking for advice on how to ensure campus products are safe for their students,” Cordray said on a call with reporters. “Many want to structure their partnerships with financial institutions to help students be successful, not bog them down with hidden fees and unwelcome surprises.”
As states cut funding for higher education, many universities partnered with banks for new sources of revenue. According to the Government Accountability Office, at least 852 schools, or 11 percent of colleges and universities, now promote debit or prepaid cards to students. About 40 percent of the nation’s students attend a college that offers a campus-branded debit card.
The cards often carry the school logo or are linked to a student ID card, giving students the impression that the school has endorsed the bank. In exchange for a cut of the revenue from the accounts, some schools give financial institutions exclusive access to students.
The University of Iowa, for instance, inked a five year contract with Hills Bank that guaranteed the school up to $191,379 a year of the money the bank made when students swiped their debit cards, a $125,000 signing bonus and another annual bonus $50,000. In its agreement with Ohio State University, Huntington Bank gave the school $25 million in payment over 15 years. The deal also included another $100 million in lending and investment.
Both schools have said that they post online copies of their contracts with banks so that parents can see what their children are signing up for.
“Colleges are not adept at making these deals,” said Christine Lindstrom, higher education program director at U.S. Public Interest Research Group, which exposed campus debit card abuses in a 2012 report. “They’re trying to deliver the best deals for the college, not necessarily the student. We’ve seen multi-million dollar deals that colleges have inked where students are exposed to high insufficient funds fees or foriegn ATM charges.”
Campus cards became a popular way for schools to disburse what are known as credit balances, the money left over when a student’s financial aid award exceeds the tuition and fees owed to their schools. Most schools not only let students receive federal aid on debit and prepaid cards, but also outsource the processing of that money to their financial partners on the card deal, the GAO said.
The problem with this arrangement is that some of cards have fees that can eat into student aid. Fees on these cards—overdraft or maintenance fees—are comparable with the kinds of charges you’d encounter at a bank. But some card issuers impose a fee for card purchases using a PIN number rather than a signature. GAO researchers couldn’t pin down the total fees students are charged because some companies refused to give up that data.
“When students first arrive on campus, they face a dizzying array of decisions, and trusting their school shouldn’t lead to adopting a financial product with tricks and traps,” Rohit Chopra, the CFPB’s student loan ombudsman, said on a call with reporters.
Schools often act as middlemen for their financial partners, pushing students into products, rather than presenting unbiased information about their options, much like they did with credit cards.
Congress outlawed the worst practices in the credit card space with the 2009 Credit Card Accountability, Responsibility and Disclosure (CARD) Act. The law prevented card issuers from marketing on campus, required students under 21 to have a co-signer or parental consent and forced schools to submit their contracts with card companies to regulators. But it doesn’t extend to debit and prepaid cards.
Last year, a group of 65 congressional Democrats, led by Sen. Tom Harkin (D-Iowa) and Rep. George Miller (D-Calif.), introduced legislation to prevent universities from steering students into payment products. The bill died in committee, and is unlikely to be taken up this session.
The Department of Education took up the campus card issue in February as part of a broader review of student aid programs conducted by a 15-member panel of consumer advocates and educators. The group couldn’t reach an agreement on what to do, leaving any changes in the hands of the department. The agency said it has no set timeline for completing a rule.