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At dozens of campuses across the country, banks pay universities for access to a captive and often lucrative audience: Their students.
Though some regulators have criticized these arrangements as an “unholy alliance” between financial institutions and colleges, the law still considers them to be consistent with students’ best financial interests — even when the accounts and cards these banks offer to students have fees that are higher than those offered to a large swath of students.
Now, advocates are calling on the U.S. Department of Education to more aggressively monitor these arrangements after years of evidence that the current approach to the rules isn’t doing enough to protect students from potentially harmful financial products.
Students who attended schools with one of these agreements in place paid 2.3 times in fees on average than students who attended a school without one of these agreements, according to a 2019 analysis from the Public Interest Research Group.
“There’s real questions about whether in particular certain schools and certain banks are actually offering deals that are in the best financial interest of students, when you see continually high fees, gotcha fees,” said Seth Frotman, the executive director at the Student Borrower Protection Center, which is urging the government to ban the use of these agreements.
Frotman added that “no one is envious of what’s on the plate of the incoming Education Secretary or the new leadership at the CFPB.” Still, his organization in partnership with the Financial Transaction Clinic at the University of North Carolina School of Law, released a memo Friday to emphasize “how important it is to continue the work of cleaning up this market.”
The Department of Education didn’t immediately provide comment on the memo’s suggestions.
Focus on the way students receive financial aid in excess of tuition
The relationship between financial institutions and colleges has been in regulators’ crosshairs for years. Most recently that work has focused on agreements between colleges and banks to distribute financial aid funds in excess of tuition. Often colleges will distribute this money on debit or prepaid cards and colleges and financial institutions will partner to market certain versions of these products to students.
In 2015, the Department of Education issued a rule that required banks and schools to work out deals that are “not inconsistent with the best financial interests” of students.
There’s evidence to indicate that the regulations did increasingly provide students with access to safer, no-fee accounts. But a 2017 report from the Consumer Financial Protection Bureau found that students who used products that were marketed to them through these agreements were still paying $27.6 million in fees to banks.
Though the report was drafted in 2017, it wasn’t released until 2018 by the Trump administration under pressure from a Freedom of Information Act request.
Leadership put in place by the Biden administration has historically been aggressive on this issue
With new leadership in place that’s historically been aggressive on these issues — former CFPB director Richard Cordray will head the Department of Education’s Office of Federal Student Aid and Rohit Chopra, the former student loan ombudsman at the CFPB, is slated to take the helm at that agency — advocates like Frotman are urging regulators to strengthen their enforcement of the 2015 rules.
In the memo released Friday by Frotman’s organization and UNC School of Law’s Consumer Transaction clinic, they recommend banning these paid marketing agreements between schools and financial institutions. Short of that, they suggest the Department set a benchmark based on the fee-free structure offered to most students and penalize schools if they enter an agreement that leaves students worse off than that benchmark.
David Pommerehn, senior vice president and general counsel at the Consumer Bankers Association, said in a statement that the banking industry trade group worked with the Department of Education in 2015 “to develop policies governing these services that were fair and transparent for students.”
“As stakeholders — students, colleges, and financial institutions alike — agreed at the time, imposing a rigid, one-size-fits-all approach would dramatically limit students’ access to safe, secure, and convenient banking options on campus,” Pommerehn said.
It’s easy to see why these agreements proliferate. On the one hand, college students can be a lucrative demographic for financial institutions: they’re young and therefore likely to stick with a bank account or credit card they’re introduced to at this time in their lives, providing companies with decades of value.
At the same time, colleges are strapped for funds. The business model has been squeezed at many universities over the past several years and the pandemic only exacerbated the financial challenges colleges are facing. That dynamic may make schools eager to bring in revenue any way they can.
Those incentives for both the banks and the schools can put students at risk when they team up, said Nancy Kim, a professor at California Western School of Law.
Students are “in this environment, where you’re learning,” she said. “Banks know that and they’re not seeing it as their responsibility to educate and the question is where is this education going to happen and is it education that does more than simply disclose, does it actually educate?”
When, through these agreements, schools appear to endorse certain products, for example, through a co-branded card, students may not be as vigilant about combing through their complex terms, Kim added.
“People tend to let their guard down a little bit more, they don’t read the fine print as carefully,” she said. “Especially if the school is getting paid I think there is something that could be done there as far as sharing that wealth.”
Debit card arrangements are just the latest to concern regulators
The debit card agreements are just the latest arrangements between schools and financial institutions that have troubled regulators and consumer watchdogs. In the mid-2000s, a probe by then-New York Attorney General Andrew Cuomo found that student loan companies were offering financial aid officers perks like spa treatments and sports tickets to recommend their products to students.
As part of the 2009 CARD Act, signed into law in the wake of the financial crisis, lawmakers placed limits on the ability of credit card companies to market to students on campus after witnessing an alarming uptick in credit card debt among students. The law also tightened regulations on agreements where credit card companies paid colleges for access to their student contact lists, use of their logo and other practices.
Evidence has piled up over the past several years about the way seemingly small financial shocks, like a bank overdraft fee, can impact students’ progress towards their degrees. The economic implications of the pandemic may have put more students at risk of facing those challenges.
Exposing students to high-fee accounts could exacerbate both the financial gulf between college students and their older, wealthier peers and between the haves and the have-nots in college, Kim said. Indeed, the 2017 CFPB report suggests that at some schools where average fees are higher than median fees, relatively well-off students are paying little or nothing at all in fees because they rarely overdraft and students facing financial challenges are continuing to overdraft.
For account holders with relatively low incomes, like many college students, the fees take a large bite out of their budget and could be the start of a downward financial spiral, Kim said.
“The fees get waived for those who don’t really need the fees waived and they don’t get waived if you don’t have direct deposit into the account or you don’t have a minimum balance,” Kim said.
“There is that other aspect of it, which is that folks who have more money feel more empowered to get their needs met. They call customer service, they have the time customer service, they know who to call,” Kim said.
It’s the difference between, “feeling entitled to complain about this issue as opposed to ashamed about it.”
