If you thought buying textbooks, desk lamps, and extra-long sheets would be your child's biggest headache on the way to college, think again.
Debit card fees are coming to bite college students.
Debit card issuers are charging hefty overdraft fees, according to a recent report by the Consumer Financial Protection Bureau. The median charge is $34, often on transactions of $24 or less, and those fees are hitting millennials and college students especially hard.
Young people are the heaviest users of debit cards, according to Census Bureau data. And the CFPB found that young people are the ones most likely to incur overdraft fees.
Only 61.5 percent of consumers aged 18 to 25 had no overdraft fees during the survey period, compared to 84.6 percent of consumers aged 62 or older.
"Despite recent regulatory and industry changes, overdrafts continue to impose heavy costs on consumers who have low account balances and no cushion for error. Overdraft fees should not be 'gotchas' when people use their debit cards," said Richard Cordray, director of the CFPB.
Debit cards grow
The impact on college students stems in part from reforms enacted in 2009, when Congress passed the CARD Act and limited companies' efforts to market credit cards on campus.
As credit card marketing has decreased, so has student credit card ownership. Some 42 percent of students had credit cards in 2010, but only 30 percent did in 2013. But even as credit cards' presence began to fade, debit cards made inroads. As of 2013, 77 percent of college students had debit cards, according to a report by Sallie Mae.
Why the growth? In part, it's because colleges and universities have lucrative deals with outside companies to provide the cards in exchange for payments to the schools. Sometimes the debit cards are the vehicle for receiving financial aid refunds.
Some 11 percent of colleges and universities have these agreements to provide things like debit cards to students, according to a Government Accountability Office report. And those schools are large: they account for 40 percent of college and university enrollment.
Few colleges and universities disclose information on their arrangements with financial institutions, a practice that the GAO and the CFPB are urging them to change. But Huntington Bank has stated publicly that it is paying The Ohio State University $25 million in an agreement that makes it the "official consumer bank" of the school. And in an agreement that is fully disclosed – between the University of Iowa and Hills Bank and Trust Company – Hills has promised to pay the university guaranteed payments of $1.04 million over five years, and incentive payments could push that several hundred thousand dollars higher.
A spokesman for the University of Iowa said the school entered the agreement after a competitive bidding process aimed at finding the best deal for students, and it has resulted in new branches on campus. As of the end of 2013, the university had received $125,000 in a signing bonus and $127,000 in annual royalties and revenue from an incentive plan. Students incur overdraft fees, the spokesman said, at a rate "significantly lower than the general population," and the university does not use debit cards to disburse student aid.
The debit cards banks promote through colleges and universities may not be a bad deal. Studies have found that often, many of the cards' fees tend to be roughly in line with those of competing banks. But it is important for students to make sure the card their school offers is the best one for them – or if a debit card is even a good idea, said Jim Hawkins, an associate professor at the University of Houston Law Center.
"Usually, 10 choices of a financial product is better than one. And when your school only tells you about one and they are telling you about it because they are getting paid by that company, it makes sense that the free market's not functioning the way classical economists think it should," he said. "To me, that's the real issue. If you are not thinking, 'Well, where should I get my bank account?' you are not thinking, 'Well, what are the costs I should consider?'"
Hawkins also points out that numerous studies have shown that consumers do a poor job of predicting the true cost of a financial product. But when they are told what costs actually are – if someone considering a payday loan is told that a large percentage of borrowers run a balance for a long time – they tend to be more cautious.
In the case of debit cards, Hawkins said, college students might be more wary if they knew things like the frequency of overdrafts for people their age. But that is not information colleges regularly disclose, he added.
"Even though you think you are not going to have overdrafts, look at how often people your age overdraft. Is $100 worth it to have that debit card? Or is it better to just go with a cash budget or write checks?" he said. "Trying to make a realistic guess about how much it's going to cost you is really important."