College students often have to scrape together funds from student loans, grants, scholarships, work, or family to pay for their education. Most of these students don’t anticipate their college profiting from student debt via deals with banks. The truth is, many colleges are doing just that. How does this happen?
Until recently, some colleges used credit balances on student financial aid packages to make a profit. If a student’s package included more than enough to cover tuition and other fees, the balance was automatically put on a “credit balance” debit card for the student’s use to cover other expenses, like books. What the student wasn’t told, though, is that the school was receiving money from the financial institution that provided the debit card. Very often, the fees for overdrafts or to use the cards at ATMs were higher than those paid by other customers. Some of these “hidden” deals also involved marketing credit cards to students. Wells Fargo, as an example, posted $11.3 million within the period of one year by charging students an average of $44.84 in fees, an amount that most students can ill afford.
Until the Credit Card Accountability, Responsibility and Disclosure (CARD) Act was passed in 2009, it was not unusual for credit card companies to set up displays on campuses, offering cards to students. Keep in mind that most of these students were unemployed or only working part-time to help finance their education. Nevertheless, hundreds of universities allowed this in return for a cut of the proceeds, and these deals were never made clear to either students or their families. Schools raked in millions of dollars to the tune of nearly $43 million in 2009. That’s about half of the money the schools earned in total. The CARD Act put some brakes on the practice that same year.
Many legislators are still uncomfortable with these relationships and have introduced additional bills to end the payoff systems. The Department of Education has also gotten involved. However, the panel of consumer advocates and educators made no decisions on how to change the system. Because of this indecision, card companies have merely found new ways around restrictions.
For example, banks have started soliciting alumni associations. These offers come to alumni through the mail, urging recipients to sign up for a credit card attached to their alma mater, complete with the school seal and scenes from campus. Of course, alumni associations profit from this arrangement. The Alumni Association at Penn State, for example, received $2.8 million from its deal with the Bank of America subsidiary, FIA Card Services. The Consumer Financial Protection Bureau reports that in 2013, college alumni associations gained over $15 million from similar arrangements.
The lack of transparency is the most serious problem with the relationships between colleges and financial organizations and student debt. The CARD attempted to correct the problem, but there is still much work to be done to prevent banks from skirting regulations and continuing the practice.
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