Published: Dec 17, 2016 8:58 a.m. ET
Students could find better bank accounts if they shopped around on their own
Many colleges and universities in the U.S. received failing grades this week from a government agency that claims the schools are sponsoring bank accounts and credit cards that are costly to their students.
The Consumer Financial Protection Bureau published a report Wednesday about the contracts schools enter into with banks, sometimes sponsoring their financial products and allowing them to be marketed with the school’s logo. Not all of those products are ones that students should actually be using, the CFPB found, because they have high or unexpected fees. Students could find better deals if they were just shopping around for those products on their own, the CFPB wrote in its report.
The CFPB found “dozens of deals” that schools have entered into with banks that don’t place any limits on costly account fees — including overdraft fees, out-of-network ATM fees or other common charges. Those deals could be in opposition with regulations the Department of Education announced in 2015 that said colleges must ensure accounts marketed under such agreements are “not inconsistent with the best financial interests of the students opening them.” The schools are required to do “reasonable due diligence reviews” at least every two years to determine whether the fees in those agreements are consistent with or below prevailing market rates. Those rules apply to the schools that participate in the federal financial aid program, which is nearly all schools with agreements.
“Students shouldn’t get stuck with the bill when their school inks a deal for an account that’s not in their best interest,” wrote Seth Frotman, the CFPB’s student loan ombudsman.
The CFPB did not identify which schools have entered into agreements that have unfavorable terms, but said about 10 million students attend colleges or universities that have a deal with a financial institution where the college directly markets financial products. (The Department of Education requires most colleges to publicly disclose their marketing contracts with banks, but schools in contracts that charge high fees aren’t specifically called out. Students can check whether their school has reported a contract with a financial institution by checking the Department of Education’s database.)
This isn’t the first time the government has raised alarm about financial products marketed to young people. U.S. President Barack Obama in 2009 signed into law the Credit CARD Act, which required financial institutions to more clearly explain the terms of their credit cards. It also specifically made getting a credit card more difficult for consumers under age 21.
Consumers can hurt their financial futures for the long term if they fall into credit card debt. And the CFPB has found that credit card companies that are targeting consumers with low credit scores (which may apply to college students, who haven’t had the time to establish credit yet) often send promotional mail to borrowers with lower levels of education. And often, cards marketed to these lower-educated and lower-income consumers have undesirable terms, including high interest rates that can make paying back credit card debt difficult. And on top of that, being unable to pay debt hurts consumers’ credit scores, making it harder for them to take out loans with desirable terms in the future.
Also, because college students are often trying to stretch a small amount of money to pay their expenses, overdraft fees could set them back in trying to purchase groceries, books and other important items, said Whitney Barkley-Denney, the policy counsel for the Center for Responsible Lending, a nonprofit based in Durham, North Carolina. Amounts of money that seem small to many adult consumers could actually prevent them from being able to survive and graduate in some cases, she said.
That said, college students aren’t the only ones paying costly bank fees.
Banks made about $11.2 billion in 2015 just from overdraft and non-sufficient fund fees, according to the CFPB. Just 8% of account holders end up paying about 75% of all overdraft fees, often because they overdraft repeatedly. Many people who make up that 8% are young or low-income consumers, said Thaddeus King, an officer for the consumer banking project at Pew Charitable Trusts, a nonprofit based in Philadelphia.
Overdraft fees can be confusing for people signing up for accounts for the first time, King said, and since many college students may not be knowledgeable about financial products yet, they are at risk for ending up having to pay them.
(For example, banks are required by law to let consumers opt in to giving their account the ability to overdraft. Once consumers enter into that agreement, merchants can charge their cards, and their accounts won’t reject the charge. As a result, they may be charged up to $35 as an overdraft charge, which can happen multiple times, if they don’t realize they have overdrafted and they continue to use their cards. Choosing not to allow an account to overdraft can actually be a better financial choice because a merchant will reject the charge, and the account will not overdraft. The consumer’s credit score also shouldn’t be affected by having a debit card rejected at checkout. Pew has found that more than half of consumers who overdraft don’t remember opting in to an overdraft agreement.)
If consumers switched to low- or no-fee checking accounts, those who use the “average” checking accounts the CFPB has previously analyzed could save about $670 over a decade on ATM fees, maintenance, overdraft and nonsufficient funds fees, Sean McQuay, an expert at the personal finance company NerdWallet, previously told MarketWatch. Particularly for people with low incomes (including many college students), those fees can add up.
NerdWallet offers a list of the best free checking accounts of 2016, which includes online banks. The online options may work well for college students, so they won’t be limited to using banks located near their campuses. Still, consumers should check what fees are associated with the online accounts; some banks and financial institutions reimburse account holders if they use out-of-network ATMs, since the online banks sometimes don’t have their own ATMs.
McQuay also recommended looking at small community banks and credit unions. They don’t always have the best online services, especially compared with online banks, he said, but they are “catching up.”