A New Debt Trap for College Students: Prepaid Cards

Financial institutions that partner with universities and colleges have propelled the growth of prepaid debit cards among college students. This new partnership is leading to further student debt from fees charged to access financial aid.

studentdebtLinking prepaid debit cards to student IDs has given financial institutions control or influence over federal financial aid disbursement to more than 9 million college students, according to The Campus Debit Card Trap, a new report from the U.S. Public Interest Research Group Education Fund (PIRG).

As a result, students accumulate bank fees on top of loans to pay for college. Fees include $0.50 per swipe, $10 or more for inactivity after six months and $38 for overdrafts. In the past, financial aid was disbursed by check and students weren’t charged any extra fees.

The growth in risky, prepaid cards for financial transactions that once occurred solely through traditional bank products perpetuates the problem of young adults with bad credit, high debt and the lack of safer bank products such as savings and checking accounts.

Research has shown that, in general, use of pre-paid debit cards transcends income levels. But students from low- and moderate-income families are particularly vulnerable because they rely on financial aid more than students from high-income families. In Illinois, about 70% of students receive some form of student aid.

PIRG’s report found that financial institutions aggressively market to students or default students into their own bank accounts to maximize fees. Higher One is the largest financial institution in the prepaid card business in schools, with agreements with 520 colleges and universities. About 80% of the company’s revenue – or $142.5 million – comes from fees from student aid disbursement cards.

In its analysis, PIRG looked at campus cards at the 50 largest public universities, 50 largest community colleges and 20 largest private universities by campus population. Contracts for debit or prepaid cards were with:

  • 32 of the largest public universities
  • 26 of the largest community colleges
  • 6 of the largest private nonprofit schools

The report has several recommendations for policymakers, including:

  • Eliminating fees for financial aid disbursement cards
  • Increasing transparency and tracking
  • Enforcing current laws and rules

Specific recommendations for the U.S. Department of Education and the Consumer Financial Protection Bureau are also offered in the report. Also, check out the New York Times’ article about PIRG’s report.

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