SOURCE: Center for Responsible Lending

Self-Help

March 31, 2015 09:22 ET

Overdraft U: Exclusive Bank-College Partnerships Yield Few Benefits, if Any, for Students

WASHINGTON, DC--(Marketwired - March 31, 2015) - A new report by the Center for Responsible Lending finds that college-bank partnership checking accounts for students offer few benefits to the students who use them. Indeed, some students end up paying more in overdraft fees on these accounts per year than the average student pays for books per year.

The student checking accounts studied in this report are those that result from exclusive agreements between banks and colleges. For banks, these agreements mean a captive audience for their products and perhaps a customer for life, as most consumers are unlikely to switch banks. For colleges, these agreements mean increased revenue. These partnerships may include revenue-sharing based on the number of accounts opened by their students and/or in-kind benefits, like the bank offering to manage the school's financial aid disbursements. 

But the benefits for students are few. In fact, these checking accounts include often some abusive and financially damaging features.

Specifically, this report examines the overdraft features of these college-bank partnership student bank accounts. The report finds such features are no better, and sometimes worse, than what students could find on their own. Many of these college-bank partnership student bank accounts allow for consumers to incur over $100 in fees in a single day, likely before the student even knows they are overdrawn.

This is especially critical when considering young adults are particularly vulnerable to overdraft fees. Young adults are more likely to overdraw their accounts than their older counterparts and each overdraft comes saddled with a fee averaging $35 -- and sometimes, an "extended overdraft fee" for student unable to add more money into their account within a set period of time.

The costs of these abusive overdraft policies are severe. The heaviest student overdrafters end up paying about $700 in overdraft fees a year with these accounts -- more than the average student pays for books.

"What this means is that financial aid dollars are being diverted from educational uses to pay bank fees," said Leslie Parrish, deputy director of research and co-author of this report. "So in a sense, overdraft fees are a loan on a loan -- a loan from the bank financed by a student loan. This is a cycle that's abusive, that costs young people dearly, and that can easily be remedied by more responsible financial products."

The Consumer Financial Protection Bureau and Department of Education are examining how to better protect students who have these types of bank accounts. The CFPB will finish taking feedback on a draft "Safe Student Account Scorecard" that can be used by colleges to negotiate better terms when entering into partnerships with banks on Monday, March 30.

"Schools are failing to take full advantage of their bargaining power to best serve the interests of their students," said Maura Dundon, senior policy analyst and co-author of the report. "Colleges have a responsibility to ensure the safety of their students -- and this should include financial safety as well. Ensuring that the products marketed on campus reflect students' best interests falls well within the scope of that crucial responsibility."

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