It’s hard enough to make good financial decisions when you are young without finding out that your college is out to get you. Or at least is encouraging bad decisions through unseemly agreement with banks. Not long ago, credit card issuers crowded American’s college campuses, offering free pizza in exchange for a card with the school’s logo and a life of hidden fees. Financial reform back in 2009 took care of many of those grave wrongs, but…surprise…there was a loophole. The CARD Act, which largely kicked bad-deal credit cards off of campus, didn’t apply to other kinds of plastic, like debit cards or prepaid cards.
So, now we have bad plastic on campus, round two. One contract I looked at recently showed a school actually getting a cut of every transaction performed by students — on or off campus. Schools get millions of dollars for these deals, and while students don’t HAVE to sign up for the cards, there are big natural incentives to do so. For starters, schools — and the Department of Education itself — can deliver financial aid payments on stored value cards.
The Consumer Financial Protection Bureau said this week it’s concerned about the developing debit and prepaid college card market. Its hands are tied by laws governing regulation of the market, so the bureau is trying a bit of public embarrassment instead. This week, it announced a “scorecard” that schools could use to disclose more details about their relationships with card-issuing banks. I covered the announcement for Credit.com. You can read my story there, or continue reading below.
The Consumer Financial Protection Bureau announced the creation of a “Safe Student Account Scorecard” on Wednesday as an effort to bring more transparency to debit and prepaid cards. Schools can ask financial institutions to fill out the scorecard, which include details on various fees and other costs. The scorecard is voluntary, because the CFPB has no authority to force it on schools or issuers.
“Financial institutions have engaged troubling practices,” CFPB director Richard Cordray said. “More recently, both the FDIC and the Federal Reserve have identified serious illegal conduct by providers of student debit cards.”
Abuses include policies that nudge students toward repeated overdraft fees.
Rohit Chopra, who runs the CFPB’s student loan monitoring program, warned that what’s happening in the college prepaid and debit card market bears an “uncomfortable similarity” to abuses that occurred in the student loan market last decade. Students who sign up for school-branded prepaid cards often find terms that are inferior to those of similar prepaid cards on the open market.
You would think when colleges negotiate with financial institutions, they would get better (terms) than are generally available,” Chopra said. “We’re not finding that.”
Some schools may not know the right questions to ask of potential financial partners, Chopra said. He hoped the scorecard could be used as a negotiation tool. Scorecard responses, which will also include the financial incentives offered to the college for signing the agreement, may or may not be made public, the CFPB said.
“There is very little data available (about college debit and prepaid cards) and in some ways that’s what troubles us about this market,” he said.
Financial institutions and others are invited to comment on the scorecard until March 15. According to documents made public on Thursday by the CFPB, the scorecard will include:
- A clear description of product fees and features: The draft scorecard specifically seeks information from financial institution partners on whether there is a fee for certain features, such as access to mobile banking and electronic statements, and the amount of any fees. In addition, the scorecard can help determine whether financial institutions charge any non-standard fees, as well as the availability of in-network ATMs. The scorecard also seeks to have financial institutions explain any other fees they may charge, such as a prepaid card reload fee or balance inquiry fee.
- Full disclosure about the financial institutions’ marketing practices: The draft scorecard requests information on how financial institutions offering school-sponsored accounts would ensure that students receive objective and neutral information on their choices. For example, the scorecard asks financial institutions to provide an explanation as to how they will ensure that a college has the ability to approve certain marketing materials using its brand or logo.
- How much the financial institution earns from the accounts: The draft scorecard provides a way for colleges to seek specific information about the cost of Safe Student Checking and Safe Student Prepaid Accounts. For example, colleges might require institutions to say how much they receive for each account opened, how much financial support they provide to the school, and how much the institution receives for each transaction with its financial product.
- Annual summary of fees: The draft scorecard would have financial institutions provide the school with an annual summary describing the fees charged to accountholders at the given college. The summary would include: number of student accountholders the previous year; average and median fees paid by a student accountholder per year; the three most frequently incurred fees per year; and the average and median fees paid by a student for each fee imposed.
Many students opt for debit cards or prepaid cards because they can’t qualify for a credit card due to their limited or non-existent credit history. These cards do not help students build their credit, however. If you’re a student wondering if you can qualify for a credit card, you’re entitled to free annual copies of your credit reports (if they exist). You can also check your credit scores for free on Credit.com.
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