Some financial institutions and colleges may be steering students to more expensive financial products
The Consumer Financial Protection Bureau (CFPB) published a report on terms and fees associated with banking products marketed in partnership with colleges to students. The report raises questions about whether some marketing deals between colleges and financial institutions comply with Department of Education rules. The report also highlights a lack of transparency in the arrangements schools have made with financial institutions. In conjunction with the release of this report, the Department of Education issued guidance to schools on requirements for college-sponsored banking arrangements and committed to additional oversight on this issue.
“Many college students trust that schools have their best interests in mind. While colleges have substantial bargaining power to obtain superior terms and pricing for their students, we find that many college-sponsored financial products cost students more than accounts that are readily available on the open market.” said CFPB Director Rohit Chopra. “Today’s report suggests that there is more work to do to ensure that students are not steered into school-endorsed products with junk fees. We will continue to work with the Department of Education to help students find the best possible products.”
A small set of financial institutions partner with hundreds of colleges and universities in the United States to disburse federal financial aid and provide financial products to students, including credit cards and prepaid and debit accounts. These partnerships often claim to support students’ financial health. However, the products marketed to students are often more costly than what students might otherwise find in the market.
The CFPB’s review included data on 11 account providers, including non-bank financial service providers, banks, and credit unions offering more than 650,000 student accounts in partnership with 462 institutions of higher education during the 2020-2021 Award Year. Among the CFPB’s key findings:
- Financial services providers and their partner schools appear to offer and promote more costly products to students than are otherwise available in the market: Students are subject to direct marketing efforts that promote accounts that impose more costs than comparable accounts – even comparable accounts offered by the same financial services provider. Some providers’ agreements with schools allow them charge students five overdraft or NSF penalties, per day, costing $175.
- One entity dominates the market for financial aid disbursements, providing nearly 70% of the accounts offered in partnership with schools—and imposes surprise monthly fees:Under this provider, accountholders are charged monthly service fees on accounts with less than $300 in qualifying deposits per month, but financial aid disbursements that may comprise the bulk of a student’s deposits do not count as qualifying deposits. Of the $15 million in annual costs paid by students in the CFPB’s sample, nearly $13 million was paid to this provider.
- Many students are directed to lists of account options that do not appear to meet Department of Education requirements: Under Department of Education regulations, students must be allowed to select the way they receive their financial aid from a neutral list, and cannot be coerced into selecting college-sponsored products under threat that their financial aid disbursements will be delayed if they choose non-sponsored accounts. The CFPB identified instances where students were told that financial aid payments might not be as timely if students didn’t choose a college-sponsored account.
- Many agreements between financial institutions and colleges do not appear to be posted prominently as required: Nearly 30% of accounts in the CFPB’s sample were subject to arrangements in which the financial services provider made payments to the partner school. Schools are required to post on their websites the agreements they have with financial services providers, any compensation exchanged between them, and the average costs paid by students. These disclosures help make the terms of the college-bank relationship transparent, but the CFPB’s review found that hundreds of schools did not appear to have posted the disclosures in the public and conspicuous manner required.
The Department of Education Increases Accountability
Today, the Department issued guidance clarifying schools’ responsibility to ensure that campus financial products are consistent with students’ best financial interests, including by reviewing whether any fees assessed are consistent with or below prevailing market rates. This guidance discusses overdraft and NSF fees, given that financial institutions in the general market have increasingly been reducing or eliminating certain fees. The Department also announced that it will take steps to enhance enforcement of its cash management regulations by tracking new data and bringing on additional staff to conduct oversight of college banking arrangements.
Today’s report is the 12th annual report to Congress in fulfillment of the CFPB’s requirements, pursuant to the Credit Card Accountability Responsibility and Disclosure Act (CARD Act). The report reviews agreements and data covering the over 1.2 million student checking and credit card accounts that are governed by partnerships between institutions of higher education and financial services providers, and highlights market trends and possible risks. In the college credit card market, the number of agreements, overall payments from issuers to institutions, and the total number of open accounts pursuant to agreements continue to decrease from 2009 levels.
Read today’s annual report to Congress, College banking and credit card agreements .
Read the Department of Education’s new blog post on the issue and its “Dear Colleague Letter ” to institutions of higher education alerting them to many of the issues identified in today’s report and providing further clarity regarding their obligations under current regulations.
Consumers, including college students, can submit complaints about credit card, prepaid, or debit accounts, and about other products and services, by visiting the CFPB’s website or by calling (855) 411-CFPB (2372). In 2015, the CFPB published a consumer advisory warning advising students that they do not need to choose the financial product endorsed by their school.