09/06/2012 03:01 pm ET Updated Nov 06, 2012

Back to College: Campus Debit Card Dangers

As students head back to school, over 9 million are at risk for increased educational debt, due to bank-affiliated campus debit cards that come with high fees, insufficient consumer protections, and few options.

Financial institutions now have affinity partnerships with almost 900 campuses nationwide, grafting bank products onto student IDs and other campus cards while often becoming the primary recipient of billions in federal financial aid to distribute to students.

While the cards seem like a good idea, allowing access to financial aid more quickly, the the convenience can come with a huge cost. Students think they can access their dollars freely, but instead their aid is being eaten up in fees. Campus debit cards are wolves in sheep's clothing.

The Campus Debit Card Trap, a report recently released by the U.S. Public Interest Research Group, finds that banks and financial firms now control or influence federal financial aid disbursement to over 9 million students by linking checking accounts and prepaid debit cards to student IDs. For decades, students would receive their aid by check, without being charged any fees to access their student aid. Now, students end up paying big fees on their student aid, including per-swipe fees of $0.50, inactivity fees of $10 or more after six months, overdraft fees of up to $38 and plenty more. Financial institutions aggressively market or default students into their bank accounts to maximize these fees.

A well-structured debit card program can provide benefits to students, but many current programs provide little to no choice, while high fees on grant and loan money leave students in deeper debt. 

So how big is this new market? BIG.
Millions of students are affected. 

Almost 900 of the 7,300 campuses participating in the federal financial aid program now have a banking partnership. Higher One, the biggest financial firm, has partnerships with 520 colleges that enroll 4.3 million students. Currently 12.5 percent, or one in eight, of all federal aid recipients nationally disburse their aid money into a Higher One OneAccount. Wells Fargo, the biggest bank in the market, partners with 43 campuses that enroll over 2 million students.

Many of the country's largest colleges already have agreements. Currently, 32 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 have debit or prepaid card contracts with a bank or a financial firm, according to U.S. PIRG Education Fund research.

There is big money at stake.  

The biggest firm in the business, Higher One, makes 80 percent of its revenues by siphoning fees from student aid disbursement cards, totaling $142.5 million of its $176.3 million total revenues in 2011, according to SEC filings. These fees include ATM and other transaction fees, overdraft fees, and interchange fees imposed on merchants who accept cards.
The most-impacted students are among the neediest. 

Students most reliant on financial aid come from low and moderate income backgrounds.  Roughly 40 percent of freshmen are first-generation college students, and about 25 percent of all students are both first generation and low income.
The service appears to be endorsed by the colleges.
Huntington Bank paid $25 million to co-brand and link their checking accounts with Ohio State University student IDs and MidFirst Bank pays Arizona State University $15 for each new bank account linked to a student ID. Other schools receive substantial payouts, revenue sharing deals, and large reductions in administrative costs.

When financial aid is involved, many banks require aid recipients to visit their website that is co-branded with the college before they choose how to receive their aid -- into an existing account, on a check or on a disbursement card -- implying an endorsement. These relationships create at least the appearance of a conflict of interest, as schools may be tempted to choose the arrangement that gives them the most money rather than the arrangement that gives their students the best deal. Trusting the school vetted a good deal, routinely up to 80 percent of financial aid recipients put money on the school backed cards.

Bottom line -- The campus debit card marketplace is tilted so that students can't get a fair deal. Campus administrations and policymakers have the power to clean it up.
Ways to avoid high fees:

1. Shop around, don't just use the campus endorsed bank account. Many banks and credit unions have 'free checking' options -- free usually means no monthly maintenance fee. Just watch out for high overdraft or non-sufficient funds fees. Also beware 'overdraft protection' programs which are designed to increase the likelihood you will overdraft -- never opt in.

2. Make sure you know how to access your money for free. Some cards charge just to swipe for a purchase, others charge higher ATM fees. Consider banks with large ATM networks and institutions who have ATMs on campus. Some accounts also offer creative ways to deposit money too, including at ATMs and by smartphone.

3. Avoid new prepaid debit cards. These cards can be sold at campus bookstores and grocery stores around campus. Prepaid cards likely carry high fees, including fees just to load money. Sticking with traditional checking accounts also lets you start building a relationship with an institution which could pay off when using their products in the future.

4. If considering your checking account options, visit the Consumer Financial Protection Bureau's website to learn more about banking and campus checking accounts.

5. Complain LOUDLY to your campus if you think you are getting a raw deal on your university sponsored bank account.

For a full copy of The Campus Debit Card Trap click here.