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Student Loan Debit Card Encourages Indebted Graduates To Shop

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This article was originally published by SmartMoney

College graduates can now pay off their student loans by paying their bar tabs. That's the marketing pitch for a debit card aimed at those saddled with loan debt.

But borrowers should tread lightly: They'll have to spend a lot on clothing and nightlife before seeing any meaningful rewards, experts say. They also may incur high fees.

Launched Wednesday, the so-called SmarterBank Visa debit card offers graduates rewards of up to 1% on purchases, which are put towards their student loan balances. The size of those rewards will depend on several factors, including the purchases a cardholder makes -- the more they swipe for, the more they can earn in rewards -- and whether they incur one of the 20 or so fees the card -- or the checking account it's tied to -- charge. The card was launched by SimpleTuition.com, a student loan comparison company, whose executives include former student loan lenders.

Though the first student loan debit card, it's not the first product aimed at students sinking deeper into debt. The UPromise credit card, for instance, offers at least 1% back on all purchases, which cardholders can use to pay down their student loans. And more will likely roll out as student debt grows, says John Ulzheimer, president of consumer education at SmartCredit.com, a credit monitoring site. Roughly 37 million Americans have outstanding student loans, according to FinAid.org. Last year, 66% -- or 1.8 million -- of Bachelor's degree recipients had student loans, a figure that's expected to rise.

Here's how the card works: Cardholders get 0.5% rewards for signature-based purchases of up to $100 and 1% on anything over that amount. (Regular debit-card programs offer 0.5% on average in rewards, according to Bankrate.com.) To earn enough rewards to make a dent in their student loan balance, cardholders will need to spend -- a lot. Someone who swipes for $1,000 in purchases per month can get up to $10 in monthly rewards. The company says those rewards can lead to real savings: If applied to a 10-year loan of $8,500 at 6.8% interest, it could help a borrower repay that debt 16 months faster and save up to $1,500. But for the roughly two-thirds of students who graduate college with loans, which are projected to average $28,700 this year, earning $10 a month in rewards will shave just five months off their repayment period.

There are also fees. Cardholders will incur a $2 fee if they use an ATM outside the card's network, while the average out-of-network fee is $1.41, according to Bankrate.com. Checking account fees include a $5 fee to get a copy of their statement and a "research fee" of $25 per hour if the cardholder wants the bank to review their account -- something many banks don't charge for, says Ulzheimer. Some of the fees are no higher than the industry average, says Greg McBride, senior financial analyst at Bankrate.com. For instance, there's a $25 charge for insufficient funds, when the cardholder tries to withdraw more money from their checking account than they have. The average fee is $30.83, McBride says.

Consumer advocates say the idea of spending to save on student loans doesn't make sense. "They're using the flashy reward of paying your loans faster by spending more money, which is counterintuitive," says Rich Williams, a higher education advocate with U.S. PIRG.

For its part, SimpleTuition.com says that the fees don't impact the rate at which rewards are earned. The company says the SmarterBank debit card can be used in conjunction with borrowers' overall plan to pay down their student loan debt. "They can get ahead and pay it down faster rather than carry it for 20 years," says co-founder Patrick Kandianis.

Consumers who'd like to use earn rewards to pay down their student loan debt can consider alternative options. Community banks and credit unions tend to offer free debit cards, which also often have rewards. Another option is using credit cards, as fees have been dropping and rewards have been rising. Consumers who avoid interest charges by paying their balance in full could potentially earn more in rewards than they would with a debit card.

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