The Business Of Student Financial Aid: Feds Zero In On Abusive Practices

“Today we’re going to hear … ”

On September 30, the Consumer Financial Protection Bureau, or CFPB, held a hearing on banking practices on college campuses. Specifically, the hearing focused on the growing practice of financial institutions partnering with colleges and universities to offer debit cards to students.

The cards are often set up to allow students to access their financial aid without lining up at the bursar’s office for a check. But the convenience of these debit cards comes with a catch. The financial institutions that offer them often charge high fees, which the students are rarely aware of until it’s too late. The card issuer throws up all sorts of barriers to make it difficult for the student to close the account and have their financial aid sent elsewhere — such as to an account at a bank that offers lower card fees.

Rohit Chopra is student loan ombudsman for the CFPB.

“If they have to pay more fees than they anticipate, that just adds insult to injury when tackling their mounting student loan debts.”

The company that dominates the student debit card market is Higher One. The University of Houston has been its client since 2001.  Most of those giving testimony at the hearing singled out Higher One for engaging in unfair and deceptive practices.

In his own testimony, Chopra described a case brought against Higher One and another financial institution last year by the Federal Deposit Insurance Corporation.

“The FDIC found that Higher One and the Bancorp Bank were charging student account holders multiple insufficient fund fees from a single merchant transaction. This allowed these accounts to remain in an overdrawn status over long periods of time, multiplying the insufficient funds fees that would be accrued.”

In a settlement of the charges, the FDIC ordered Higher One to reimburse $11 million to roughly 60,000 students.

“When it comes to Higher One, literally their entire revenue model is fee-based.”

Christine Lindstrom heads the higher education program at U.S. PIRG. The consumer group published an industry study last year, alleging Higher One derives a whopping 80% of its revenue from fees on account holders.

Higher One declined KUHF’s requests for a recorded interview, though it did respond to questions by e-mail. The company denied U.S. PIRG’s claims regarding its revenue sources. But it refused to say how much of that revenue derived from such fees, only that it was “less than 50%.”

The CFPB is only one arm of the federal government that’s investigating practices in the student debit card industry. The Department of Education set up the rules governing the disbursement of financial aid via debit cards. Mark Kantrowitz is senior vice president of Edvisors.com, which tracks student loan products.

“They’re now taking a fresh look at these regulations because of large volumes of student complaints and concern even by members of Congress that the purpose of federal student aid is to help the students pay for their college costs, not to enrich third party companies.”

Senate Majority Whip Richard Durbin is now leading a congressional inquiry into the campus debit card industry.

Late last month, he sent out a letter demanding a full accounting of fees collected from student debit cards for the last three academic years. The letter went out to the heads of nine major financial institutions — including Miles Lasater, president and CEO of Higher One.

 

The letter to Higher One CEO Miles Lasater is on pp. 7-9.

 

 

To read part one in this series, visit The Business of Student Financial Aid: Students Complain They Lose Money To Fees.

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