As student loan debt soars, so do profits at a little-known company that manages students' financial aid disbursements for some of the nation's largest public universities.
Higher One, a publicly traded company founded more than a decade ago by two Yale University undergraduates, Miles Lasater and Mark Volchek, disburses students' financial aid for more than 830 campuses, including parts of the University of Wisconsin, Montana and Wyoming systems. It reported a net income of $31.89 million in 2011, a 27 percent spike from a year earlier and 13 times the $2.28 million it earned in 2007, according to public filings.
But earlier this month Sherry McFall, a student at Ventura College, in California, filed a class action against Higher One, alleging that the company charges onerous fees and misleads students. The suit claimed that Higher One's debit card is deceptively marketed as a school's recommended method for receiving financial aid refunds, any money left over after tuition and fees are deducted from an aid package. And the suit is only the latest in a slew of problems for the company, which went public in 2010.
"Higher One contacts the student before they ever arrive on campus, says it's partnering with the school and automatically opens the student's account. So that the only way the student can elect to get the money differently is to go into the Higher One website and figure out how to move it," said Hassan Zavareei, the lawyer representing the students in the class action, in an interview with The Huffington Post.
Shoba Lemoine, Higher One's spokeswoman, doesn't deny that her company represents itself to students as a school partner, and that students are required to work with Higher One to access their financial aid refund.
"If Higher One has been hired by the school to handle the disbursements as a whole, then yes, the student has to work with Higher One to tell us how they would like to receive their refund, no matter what method they choose," Lemoine told The Huffington Post. She stressed that the Higher One debit card is optional and activated only if students select that method for receiving a refund.
Higher One is the biggest player in a growing field of companies that contract with colleges and universities to handle their financial transactions, which more institutions are outsourcing in an effort to cut costs. While many college administrators have embraced the shift, some education advocates question if the arrangements benefit the companies at the students' expense. They point to Higher One as an example of a firm that peels off profits from federally subsidized student loans even as students struggle to repay them.
"The purpose of student aid is to enable the student to go to college not to enrich a service provider," said Mark Kantrowitz, publisher of the financial aid website FinAid.org, in an interview with The Huffington Post. "The balance of revenues to providers and benefits to the school and student have tilted away from the student and much too much to the service provider."
Higher One charges students a steady stream of questionable transaction fees to access their money, according to the suit, echoing a claim made two years ago by students protesting the company's fees on campuses nationwide. There's a 50 cent charge for every debit-card swipe made with a PIN code (as opposed to a signature), and a $2.50 fee for using a non-Higher One ATM, charged on top of whatever fee the ATM owner levies.
More recently, students have asked administrators at Oregon's Lane Community College, which has had a contract with Higher One for five years, to consider alternative partners before renewing its agreement with the company, citing students' concerns over high fees; the school agreed and will be reviewing its options next month, according to the Register-Guard.
"Students need to be able to understand the costs and risks of accessing what is their scholarship and student loan dollars," said Rohit Chopra, student loan ombudsman at Consumer Financial Protection Agency. "Often, there is a free option and we hear that people don't always know that."
Lemoine argued that the company discloses its fees and offers advice about how to avoid it.
"Our fee schedule is … one click away on several websites -- including the accountholder’s website [and] our website," Lemoine wrote. A student cannot open an account "without seeing and accepting a POP UP window that shows the fee schedule and how the account works." Higher One's video tutorial about how to avoid the fees is available on YouTube and the company website, she said.
She claimed the $2.50 fee for using a non-Higher One ATM is a standard industry practice. Indeed, many major financial services companies charge $2 to $2.50 for using an out-of-network ATM; this includes Sallie Mae, which also offers a student debit card to receive financial aid refunds.
But other institutions provide customers free access to large networks of ATMs. Sallie Mae's customers can access 35,000 ATM machines nationwide free of charge. In contrast, Higher One's network includes 700 ATMs, a situation that forces students to rack up fees every time they use machines outside the network, according to the lawsuit.
McFall, the class action's lead plaintiff, claimed that she was forced to pay Higher One's ATM fees because of a lack of access to company ATMs. On her Ventura College campus of 14,000 students, only two Higher One ATMs reside; they are accessible only at certain hours and one is closed more than a month during winter vacation, according to the lawsuit.
Lack of access to Higher One ATMs is a common complaint, Kantrowitz said. "A lot of times it turns out there is only one Higher One ATM on campus. And it's not convenient, so the students go to other ATMs," he said. "They are charged these fees, and then the students are upset after a few months when the fees consume their financial aid."
Because Higher One is not a national or regional bank, it cannot be expected to have a large ATM network, Lemoine said.
But attorney Zavareei claimed that Higher One's fees are especially egregious because they redirect to the financial institution money that students have earmarked for college. "We're talking about government-subsidized loans that students are already paying interest on, and now they are getting fees they have to pay on top of that."
Lemoine argued that fees are just a part of today's financial system. "Students are going to have to pay fees wherever they bank," she said. "Whether the source is a financial aid refund or money from their parents or a job -- wherever they're banking, it's going to cost them unless they have an account that's good value to them."
In February 2011, the Federal Deposit Insurance Corporation, which investigated the firm's use of overdraft fees and collection practices, announced that it was prepared to recommend an enforcement action, according to Higher One's SEC filings. Enforcement actions often involve fines against a company or an order to cease certain business practices; they are typically recommended only after the FDIC identifies a persistent pattern of problematic operations, as opposed to an isolated incident. Details of a possible action are not public, and the FDIC declined to comment, citing a policy of not commenting on operating institutions.
Lemoine said her company is cooperating with FDIC.
Following the FDIC's announcement, Higher One's former banking partner, the Bancorp Bank, ended its relationship with the company. Bancorp, which is also a defendant in the class action lawsuit, did not respond to requests for comment.
According to Lemoine, Higher One's new banking partners are Urban Trust Bank, Wright Express Financial Services and Cole Taylor Bank.
Despite these problems, the company continues to grow. It is the largest provider of these sorts of financial services to colleges and universities, although in recent years other players have entered the market, including Wells Fargo, Citi, US Bank and PNC Bank, offering services, including checking accounts, debit cards and prepaid, reloadable cards.
These companies benefit students, said Anne Gross, vice president of regulatory affairs at the National Association of College and University Business Officers, which represents more than 2,100 colleges and universities. Contracting with financial service providers not only saves schools money but has also created more and better options for students than a paper check, the old method for disbursing financial aid refunds. Gross declined to comment specifically on Higher One.
While there is "a lot of chatter about these cards," 67 percent of financial aid refunds are still disbursed via paper check, and that direct deposit is still a more common alternative to checks than a debit card, Gross said.