By Charlene Crowell, NNPA
It’s an encouraging sign that an increasing number of students are completing high school and then enrolling in college. That’s a good thing.
But it’s a bad thing when student bank accounts come with abusive overdraft fees and place their financial aid at risk. Dollars intended to pay for textbooks and other course materials should not be stripped away by high-cost fees. Depending upon bank account terms, students could incur over $100 in fees in a single day. For those learning to manage their own finances, these fees could run as high as $700 a year.
New research by the Center for Responsible Lending (CRL) finds that more often than not, students would do better finding their own financial institution of choice, instead of relying on the convenience of a student bank account offered through an exclusive marketing agreement the school has with a given bank.
“What this means is that financial aid dollars are being diverted from educational uses to pay bank fees,” said Leslie Parrish, CRL’s deputy director of research and co-author of the report. “So in a sense, overdraft fees are a loan on a loan – a loan from the bank financed by a student. This is a cycle that’s abusive, that costs young people dearly, and that can easily be remedied by more responsible financial products.”
It’s a clever move by financial institutions always on the lookout for new revenue streams and new customers. Who better to focus on than students, usually away from home for the first time, and equally unaware of potential financial pit falls. Even better, if a banking relationship is formed during collegiate years, the looming hope is that these young adults will become life-long customers.
For colleges and universities, these relationships are often exclusive and come with measurable financial benefits. Some schools receive a share of the revenue generated -as greater numbers of students sign up for these bank accounts, the more money schools receive. Colleges may also receive in-kind benefits from their bank partner, like helping with federal financial aid disbursements.
Can you hear ‘cha-ching’ yet?
Somewhere on campus or beyond, a student is likely enjoying the freedom of being away from home, with the illusion of a financial independence. Overdrafts – with an average cost of $35 per transaction – can also lead to ‘extended overdraft fees’ that put the student even deeper into the red if they cannot repay the overdrawn amount quickly enough.
Fortunately, the growing prevalence of student bank accounts at colleges and universities has caught the attention of the Department of Education (DoE) and the Consumer Financial Protection Bureau (CFPB). The two agencies are deliberating on how to best improve safeguards for students with these types of bank accounts.
DoE is updating an important “Cash Management” rule that will govern how banks market their services to students. New requirements are expected to provide greater consumer protections.
At the same time, CFPB has drafted a “Safe Student Account Scorecard”. Designed to be used by colleges and universities, it is intended to be a guide to negotiating better terms when beginning partnerships with banks. With the March 30 deadline for public input being past, CFPB will move forward towards a final document.
The goal, according to CRL, is swift and effective actions to cease abusive overdraft practices on student bank accounts. CFPB’s banning overdraft fees on student bank accounts would be a strong step forward. Further, as DoE revisits its rules, CRL believes that at a minimum, banks should not be allowed to charge overdraft fees on transactions that otherwise could be declined at no cost to students.
“Schools are failing to take full advantage of their bargaining power to best serve the interests of their students,” said Maura Dundon, CRL senior policy analyst and co-author of the report. “Colleges have a responsibility to ensure the safety of their students – and this should include financial safety as well. Ensuring that the products marketed on campus reflect students’ best interests’ falls well within the scope of that crucial responsibility.”