Institutions of higher education, like colleges and universities, play an important role in shaping young minds. And where students need help, these institutions often offer financial aid to pay for the cost of attendance – in some cases they entrust the distribution of these funds with banks and third-party financial services. Through this partnership between school and bank, the institutions can introduce many students to their first line of credit or prepaid account through school-approved promotions. But is it safe to assume that –given these young adults’ fiscal inexperience—the university or financial institution may not have the student’s best interest in mind?
CARD Act
For the twelfth straight year, The Consumer Financial Protection Bureau (CFPB) has released a report pursuant to the Credit Card Accountability, Responsibility, and Disclosure Act (CARD Act) in which they review publicly available activity between financial servicers, colleges, and their students. These partnerships are commonly called “college banking agreements.” Colleges and universities administer over $110 billion to students every year in the form of financial aid, also known as Title IV funds. Some institutions of higher education (IHEs) administer Title IV funds themselves, but there is a good number of IHEs that subcontract the disbursement of these funds to third party services.
According to the CFPB report, there are over 460 colleges partnered with banks and financial institutions with over 668,000 identified students having active accounts in the 2020-2021 academic year. When the CARD Act was passed in 2009 partnerships between financial firms and colleges started to decline. This was because the CARD Act minimized a financial issuer’s ability to promote their services to students on or around campuses. But even though partnerships declined, the CFBP noticed that college banking agreements were on the rise.
cASH mANAGEMENT rEGULATIONS
The Department of Education became aware of this too. In 2015, the Department of Education announced new regulations that both educational and financial institutions must abide by when dealing with college banking agreements. Before these guidelines, schools and banks provided little freedom to how students received their financial aid. The new set of rules ensured that a variety of options to receive financial aid were available, including accounts without daunting overdraft fees.
However, as the CFPB report uncovers, these cash management regulations proved to be “both insufficient and [are] not being adhered to or enforced.” The CFPB found that schools are making deals under the table with these big banks and credit issuers that are extracting revenue from students through unfair fees. Though the cash management rules were meant to stop institutions from nudging students towards deceptive lines of credit or overpriced accounts, they seem to have discovered another method of achieving the same goal.
The Effects on Students
When given a unique ability to shape the fiscal future of many students, IHEs involved in college banking agreements have fallen on the side of profit. Students enter university as bright academics and financial novices, a prime audience that can last financial institutions a lifetime. Many students have never had a line of credit or a bank account all to themselves before. Many may not know what a good financial product is. What a bad financial product is! Some may not know what option is best for their situation. Rather than steer them in a positive direction, the “unholy alliance” between schools and banks potentially leads students to make agreements that surely benefit the institutions but can put students at risk.
With growing inflation rates, interest fees on the rise, and still little in the form of wage increases for student employment and entry level jobs meant for young adults in university, students must endure the burden of managing an expensive bank account just to receive their financial aid. It’s especially “a red flag,” says a CFPB official, when accounts and credit lines are twice as expensive on average at Historically Black Universities and Colleges, as well as Hispanic Serving Institutions. Students of color who perhaps rely on financial aid now must face the risk of harmful financial products from third party servicers for funds they earned.
What's Next?
Following the CFPB’s report, the Department of Education is amping up its operations on minimizing deceptive college banking agreements. By reinforcing and reinvigorating the cash management regulations, and increasing monitorization of these banking agreements, the Department of Education aims to reduce the extensive costs placed on unknowing students. These assurances are a good start, but it will take more than just scrutiny of these deceptive practices to stop them.
Whether it be through supervisory, enforcement, or even legal action, student borrower protection and advocacy groups hope the Department of Education will introduce corrective measures and updated regulations so that college banking agreements become much less threatening –both upfront and in between the lines.
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