Higher Power

Exclusive contracts give debit card company unique marketing position, raising questions about whether students are steered toward best bank -- or just one with the most access.
October 13, 2010

Dreamed up by Yale University students in a college apartment, a company called Higher One has spent the last decade gaining a unique foothold in academe. Despite some student complaints about its fees, Higher One is now the go-to distributor of financial aid reimbursements for many institutions across the country. But the company has not earned its market share without raising questions. Higher One’s exclusive contracts and enviable marketing privileges disturb some financial aid experts, who say colleges may be steering students toward a bank that may not offer them the best deal.

Under a typical arrangement with Higher One, a university will require students to go through the company as the processor of financial aid disbursements that go directly to students for expenses -- even if a student ultimately decides to have the company place the money in an account with another bank.

In practice, however, most students end up sticking with Higher One. In 2009, for instance, 76 percent of the students at participating colleges chose to bank with the company for financial aid, rather than choosing another bank, according to filings with the Securities and Exchange Commission.

The Washington Post called attention to Higher One in a recent article, outlining student disenchantment about banking fees, including a 50-cent charge for using the debit card as, well, a debit card. Customers can avoid that fee by running the card as a credit card during purchases, and the company boasts on its website that “over half” of account holders get stung with the fee only once. The company also charges a $19 monthly penalty for accounts that aren’t used for nine months, as well as a $2.50 charge for using non-Higher One ATMs. There is no charge for setting up an account or for using a debit card -- often distributed to students automatically upon enrollment -- at a designated Higher One ATM.

Student aid officials at participating institutions say the disbursement of aid dollars through Higher One is more secure and faster, even if students elect to have the company deposit funds in another bank. Before all of this outsourcing, colleges traditionally cut their own checks to students to pass along financial aid; using Higher One relieves colleges from that administrative function, while also allowing a regulated bank to handle students' personal financial information.

Several officials interviewed for this article also disputed the suggestion that universities -- whose logos appear on the debit cards -- have given the company the ostensible endorsement of the institution.

“We are not telling students, and I guess it’s the nuance, we are not telling them they have to go to Higher One,” said Jeff Terp, vice president for program analysis and engagement at Ivy Tech Community College.

Even so, about 72 percent of students who receive financial aid at Ivy Tech chose to bank with Higher One, compared with 19 percent who selected other banks, and 9 percent who preferred to receive a check, Terp said. Terp noted, however, that many of the college's low-income students didn't have a bank account at all before Higher One, and Ivy Tech encourages them to use a bank of some kind for security and to avoid high check-cashing fees.

For some, the unique entrée Higher One has to students brings up the same conflict of interest issues raised by New York Attorney General Andrew M. Cuomo with regard to the student loan industry. Cuomo lambasted colleges for cozy relationships with “preferred lenders,” some of which were given that privileged status in exchange for giving colleges a cut of the profits. While Higher One officials say the company no longer drafts contracts with financial incentives for its clients, the company previously had such arrangements and some are still active, said Miles Lasater, Higher One’s chief operating officer and founder.

Mark Kantrowitz, publisher of Finaid.org, said he sees some analogies between the perceived conflicts identified by Cuomo about student lenders and Higher One’s business model.

“You have a company that is making millions of dollars of federal student aid through having effectively a captive audience,” Kantrowitz said.

Cuomo’s office did not respond to e-mail inquiries about whether he’s aware of Higher One or has any concerns, but a recent news release referenced his efforts to review contracts with "credit and debit card companies" at approximately 300 universities.

Ed Mierzwinski, consumer advocate with the U.S. Public Interest Research Group (PIRG), said there are "some parallels" between colleges' problematic ties to lenders and contracts with Higher One, among several other companies with similar offerings. Even if students can choose another bank, they do so through Higher One's site, and that's an advantage for the company, he said.

"If you walk through the door marked Higher One, you have to choose to walk back out. The choice has already been partially made for you," Mierzwinski said. "It's a tremendous advantage to have [students] make their decision in your space."

Lasater said he can appreciate why some would question the distinction between Higher One’s approach and that of lenders who took so much criticism, but he sees his company’s relationship with colleges as far more transparent.

“I can understand why people ask the question,” he said. “I think the context people should remember is that it’s a public buy-in process. The relationship is clear to students. They can make a choice, and they can make an ongoing choice. Students can switch anytime.”

Students may have a choice of banks, but there is something of an additional hurdle for those who choose not to go with Higher One. To elect for a different bank, a student has to print out a form and mail it to the company, Lasater said. Students can complete the entire Higher One registration online.

Some Colleges Get Revenue Off Accounts

The University of West Florida is among the institutions still receiving some compensation from Higher One. West Florida gets a share of interest revenues off the funds processed by the company, and that has brought in around $6,800 annually since the university began its relationship with Higher One in 2007, said Colleen Asmus, assistant vice president for finance and university controller.

In the grand scheme of the university’s budget, the interest payments are very minimal, Asmus said.

“My point is that was not the motivating factor,” she said.

It also costs more for West Florida if the money goes into a third-party account, according to a contract provided to Inside Higher Ed through a public records request. Higher One charges the university 10 cents for disbursing funds for West Florida students into a third-party account, compared with no charge for depositing money into a Higher One account.

“That is not an incentive to the university to steer anybody in another direction,” Asmus said. “If we have to absorb 10 cents per transaction, we’re fine with that.”

The differential fee structure outlined in West Florida’s contract is one “we’ve not used for some time,” and the company now charges about 40 cents per disbursement regardless of which bank is selected, Don Smith, a company spokesman, said in an e-mail.

“We say that for less than the cost of a stamp we will disburse your refunds regardless of how the student chooses to receive it,” he wrote.

Company's Earnings Soar

Higher One’s foray into the business behind financial aid has been lucrative, according to the company’s SEC filings. The company, which serves 4.8 million students at more than 675 colleges, reported $26.9 million in revenues in the second quarter of 2010. That marked a 116 percent increase from just a year earlier.

The company touts its performance as key to its success, noting an “A+” rating with the Better Business Bureau and a 98 percent client retention rate.

There has been some grumbling of late from students, however. A Facebook group, called Boycott Higher One, describes the company as a “predatory banking organization that leeches off unsuspecting students.” The group’s 66 members hardly constitute a mass uprising, but similar groups have emerged on individual campuses.

Complaints about the fees have also prompted Portland State University and Southern Oregon University to renegotiate their contracts, removing the particularly unpopular fee for using a PIN number instead of running a credit purchase, The Oregonian reported.

Despite pockets of concern, others are questioning whether raised eyebrows are really warranted. Anne Gross, legislative affairs director for the National Association of College and University Business Officers, notes that colleges have had relationships with banks for years, granting some the privilege -- for instance -- to set up teller machines on campus. A relationship with a company like Higher One is an extension of university efforts to offer security and convenience to students, she said.

“When you give a student a check and they don’t have a bank account, what are they going to do with that check? At inner city schools they are going to go across the street to a check cashing place and lose [a percent] off the top," she said. "Schools have an interest in getting their students to use the banking system and use a bank account. They have an interest in reducing those lines at the bursar’s office. They have an interest in students not getting robbed.”

Among those looking critically at Higher One is Tim Ranzetta, founder and president of Student Lending Analytics (SLA), an independent research and advisory firm that evaluates student lenders. Ranzetta dug into company filings to explore Higher One’s business model, devoting a blog post to what he describes as potential conflicts of interest. Among the issues Ranzetta highlighted was Higher One’s marketing strategy, which includes the use of “school-branded communications” to drive students into the company’s accounts and increase their usage of the accounts. Additionally, the company selects student volunteers to “implement a word of mouth program” where selected students market the company to others on campus.

Asked about student marketers, Lasater said they are part of the company’s “Game Time” program. The students are not given financial incentives to participate in the program, he said, and they are encouraged to speak honestly about their experiences with Higher One.

“It’s an attempt to engage both positive and negative feedback, and we’re always very clear with folks that we want them to tell the truth,” Lasater said.

While there is no direct payment for “Game Timer” service, the website pairs financial literacy advice with giveaways for $50 iTunes gift cards and application forms for $50,000 in scholarships valued at $2,500 apiece. As a debit card provider, Higher One is exempt from recent Congressional legislation that bars companies from distributing T-shirts and other prizes on campuses to induce students to sign up.

In addition to access to university trademarks and logos free of royalties, a sampling of Higher One contracts shows boilerplate language that grants the company permission to include marketing materials in university mailings. Higher One is also authorized to market their services by e-mail, telephone, posters, press releases and news advertisements.

“If possible, the institution will also inform student’s parents about the services,” several contracts state.

The e-mails Higher One sends to students often include information on financial literacy, and the University of North Texas welcomes that kind of outreach, said Kayle Godinez, director of student accounting.

“They really are highly interested in helping the students become financially literate,” she said, “more so than most banks, actually.”


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