Sunshine for Campus Debit Cards?

U.S. consumer bureau officials call on financial institutions to disclose the agreements they have with colleges to provide students with debit cards. The lack of transparency constitutes a "risky practice," agency's director says. 

December 18, 2013

U.S. consumer protection officials on Tuesday called for financial institutions to publicly disclose their agreements with colleges to market debit cards and other products to students.

The arrangements -- which have increasingly come under scrutiny from consumer advocates, federal agencies and lawmakers -- often involve financial companies paying colleges to offer institution-branded student ID cards that double as a debit card or separate debit cards that students use to gain access to their federal financial aid money.

The partnerships offer colleges an additional source of revenue while they provide banks and other financial institutions access to a potentially lucrative pool of new customers.

But the terms of such agreements should be made publicly available, Consumer Financial Protection Bureau Director Richard Cordray said Tuesday.

“Students and their families should know if their school, whether well-intentioned or not, is being compensated to encourage students to use a specific account or card product,” Cordray said in a statement. “When financial institutions secretly give kickbacks to schools, they are engaging in risky practices.”

The consumer watchdog bureau said Tuesday that it may consider the failure of a financial institution to disclose its arrangements with colleges as an increased risk to consumers, which could, in turn, increase the likelihood that the institution would receive more scrutiny from the bureau.

Officials will be formally asking financial institutions about the transparency of their agreements with colleges next year, according to a blog post by CFPB Student Loan Ombudsman Rohit Chopra.

“We’ll be asking financial institutions about whether existing agreements are made available to students and families in a clear and conspicuous place on their company’s website,” Chopra wrote. He said that according to a survey of college officials, the details of 69 percent of debit card arrangements are already available to the public. But, he added, they can be difficult to obtain and may require filing an open records request under state law.

One the largest providers of student debit cards is HigherOne. The Connecticut-based company has drawn criticism from student advocates and federal regulators for its fee structure. (The company is in the final stages of settling a class action lawsuit related to its fees for $15 million).

Mark Volchek, the chief executive officer of HigherOne, said in a statement Tuesday that the company was “generally in support of the open disclosure of contracts with campuses for consumers so long as the standard for disclosure is applied equally to all third-party servicers.”

“Today, the majority of our contracts are already open to the public,” he added. A spokeswoman for the company clarified that the contracts are available to the public through state freedom of information laws. Private institutions are generally not subject to state open records laws.

Debit cards, prepaid cards and other financial products that are marketed to students are not subject to the same rules as college-affiliated credit cards, which Congress cracked down on in the 2009 CARD Act. That law requires banks to disclose their agreements with colleges to the CFPB, which makes them available online.

Since that requirement went into effect, the number of colleges with agreements with credit card providers has plummeted by 41 percent, from 1,045 in 2009 to 617 in 2012, according to the CFPB’s latest figures released Tuesday. In its annual report on campus credit card agreements, the bureau found that not only had the number of such arrangements dropped but that fewer students were opening college credit cards. That figure fell by 18 percent between 2009 and 2012.

In an October report, CFPB officials expressed concern that as the number of credit card agreements dropped, financial institutions were marketing other products, like campus debit cards, that come with fewer restrictions.

The arrangements to provide debit cards and checking accounts may mirror some of the problems that previously arose with private student loan kickbacks and predatory credit card marketing on campuses, the bureau concluded after a seven-month inquiry into the contracts.

Rep. George Miller, a California Democrat, who has raised concerns about campus debit cards, echoed those concerns in a statement Tuesday that praised the CFPB’s call to make the agreements public.

“This is not the first time that financial institutions have targeted students on campus,” he said, citing the student loan and campus credit card controversies. “Financial institutions have not learned from their past transgressions and continue to offer colleges lucrative financial incentives to hand over the keys to the campus.”

In addition to the CFPB’s focus on campus debit card agreements, the Education Department has also said it plans to create new regulations about how federal student aid can be disbursed on campus debit cards. A negotiated-rulemaking panel will begin meeting in February to hammer out those regulations.

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Michael Stratford

Michael Stratford, Reporter, covers federal policy for Inside Higher Ed. He joined the publication in August 2013 after a stint covering the Arkansas state legislature for The Associated Press. He previously worked and interned at Kiplinger’s Personal Finance magazine and The Chronicle of Higher Education. At The Chronicle, he wrote about federal policy and covered higher education issues in the 2012 elections. Michael grew up in Belmont, Mass. and graduated from Cornell University, where he was managing editor of The Cornell Daily Sun.

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