Their on-campus credit card activities now closely monitored by federal regulators, financial institutions increasingly are turning to debit cards, prepaid cards and bank accounts to attract college students into financial relationships, according to a new government report.
The federal Consumer Financial Protection Bureau (CFPB) reported this week that marketing promotions and profitable deals between credit card issuers and colleges and universities have declined significantly since new federal rules took effect in 2009.
But similarly lucrative deals involving debit cards, prepaid cards and bank accounts -- all unaffected by the new regulations -- are on the rise. In fact, unmonitored marketing relationships involving debit and prepaid cards and bank accounts now outnumber campus-related credit card agreements, the CFPB reported.
Consumer advocates and other critics have asserted for years that such deals between schools and financial institutions prey on young, unsophisticated college students and can swamp them in debt, while showering colleges with huge financial rewards.
"As a result of strong public disclosure and consumer protection rules, consumers are being made aware of the tricks and traps that were layered into credit cards marketed on campus," Ethan Senack, a higher education specialist at the U.S. Public Interest Research Group, a Washington, D.C.-based federation of state public interest research groups, said in response to the CFPB report.
5 Things About Credit Cards Grown-Ups Won’t Tell You
How to Start Funding an IRA for Your Kid
3 Financial Rules Every Freshmen Should Follow
Smart Financial Tips for College Students
Freshman Year Survival Guide
Bleak Employment Outlook Spurring New Generation of 'Super Students'
Broke at Big U? Short-Term College Loans May Help
Earning College Credit Outside the Classroom
"But, at the same time, financial institutions are using the lack of disclosure requirements around debit and checking cards to keep students in the dark," Senack said.
Campus credit card deals falling
The federal report issued this week found that:
- The number of on-campus credit card agreements has been dropping precipitously since the federal Credit Card Accountability, Responsibility and Disclosure (CARD) Act was signed into law in 2009. The CARD Act requires credit card issuers to produce annual reports of the number of new credit card agreements with colleges and universities, the terms of those agreements, and the compensation paid to the schools under those agreements.
- In 2009, 1,045 college card agreements were in effect, generating more than 2 million accounts. In 2010, 1,004 agreements generated 1.7 million accounts. By 2012, those numbers fell sharply to 617 agreements 1.2 million accounts.
- Consequently, colleges and universities are pocketing less card-related revenue at the expense of their students and their parents. In 2009, institutions of higher learning reaped nearly $84.5 million from these arrangements. Last year, that fell to about $50.4 million, a decline of nearly 40 percent.
- FIA Card Services, a Bank of America unit, continues to be the dominant issuer in the arena. In 2012 it had 412 of the 617 agreements, nearly 1 million of the 1.2 million accounts and made $36 million of the $50 million in payments.
CFPB Director Richard Cordray took some comfort in the pattern, and he specifically praised the public disclosure element of the new rules.
"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 written statement. "When financial institutions secretly give kickbacks to schools, they are engaging in risky practices."
At the same time credit card agreements are on the wane, deals involving on-campus debit cards, prepaid cards and other financial instruments are on the rise, according to the report.
Many of these agreements are poorly understood, the bureau said, and they're often insidious. In some cases, student financial aid and even student identification details and authorizations are loaded onto the debit cards, ensuring that the cards are habitually carried and frequently used.
"While the use of campus credit cards dwindles, two in five students now carry a debit card issued through their campus," the Public Interest Research Group (PIRG) reported last year.
Other campus agreements rising
It said it found at least 900 debit card partnerships between institutions of higher learning and banks and other financial institutions. Thirty-two of the 50 largest public four-year universities, 26 of the largest 50 community colleges, and six of the largest 20 private not-for-profit schools had such debit or prepaid card contracts, the group said.
"Campus debit cards are wolves in sheep's clothing," said Rich Williams, PIRG's higher education advocate and the report's co-author. "Students think they can access their dollars freely, but instead their aid is being eaten up in fees."
This past September, during a CFPB public forum on campus banking, Meghan Johnson, a sophomore at Iowa State University who is studying journalism and political science and wrote an article about cards on campus, said that students often are finding their financial options limited by the schools they attend.
"When there is only one checking debit option, then we are captive to whatever fees are pushed on to us," Johnson told the group. "If there were more banking options available, then we could shop around and find the account with the fees and other features we want."
Congressional Democrats inquire
In response, Congress again is looking into the matter of on-campus financial marketing. In September, seven Democratic U.S. senators and representatives sent letters of inquiry to the leaders of eight banks and another financial services provider.
They asked for information regarding the number of bank agreements with schools and the co-branding use of college or university logos, symbols, mascots and names. The also requested details regarding the amount of money produced by these agreements and any "monetary or non-monetary" gifts that might have been paid to school officials or organizations in return for promotional and marketing access to students.
"These lucrative deals are great for banks and great for colleges, but students can get hurt when they are steered into financial products that carry high fees," the members of Congress told the bankers. "When students are forced to pay unnecessary or exorbitant fees that bolster bank profits, it makes college more expensive, particularly when those fees eat up financial aid dollars that are intended to help students pay their bills."
The letter was signed by Sen. Dick Durbin of Illinois, Sen. Sherrod Brown of Ohio, Sen. Elizabeth Warren of Massachusetts, Rep. George Miller of California, Rep. Maxine Waters of California, Rep. Louise Slaughter of New York and Rep. Peter Welch of Vermont.
They noted that the CARD act's provisions regarding on-campus credit cards were imposed in the wake of multiple reports regarding abuses, and they fired a new shot across the bows of the banks.
"These recent reports [regarding debit and prepaid cards on campus] raise new concerns that financial institutions are once again going after college student and offering colleges financial incentives to hand over the keys to the campus," the letter said. "It is unfortunate to see that some institutions haven't learned from past missteps and are repeating these troubling practices."