Partnerships between colleges and financial firms are pushing students towards financial products that aren’t in their best interest — even though it’s against the law.
That’s one takeaway from a report released recently by the Consumer Financial Protection Bureau analyzing deals between schools and companies to offer bank accounts and credit cards to students. The report found that hundreds of thousands of students are being steered towards bank accounts with unnecessary fees and that colleges aren’t properly disclosing their relationships with financial service providers, among other findings.
Ed Mierzwinski, senior director, federal consumer program at PIRG, called the report “damning.” Mierzwinski’s organization has criticized the way colleges and financial institutions partner to market to students for decades. He said the report released in October provides more documentation that “there is a lot of stuff going on here that seems to violate the law.”
“If you read this report, read this report between the lines, read it directly, you will find that it says ‘we see a lot of problems from where we’re sitting,’” he said.
The practices identified in the report persist despite years of scrutiny on the relationship between campuses and financial institutions by advocacy groups like Mierzwinski’s and regulators, like the CFPB and the Department of Education. In 2009, Congress passed the CARD Act, which clamped down on credit card issuers’ ability to market to students on or near college campuses. But as partnerships between colleges and card issuers declined in the wake of those regulations, the CFPB warned in 2014 that “the number of agreements between institutions and checking account, debit card and prepaid card providers has been increasing.”
In 2015, the Department of Education announced regulations, known as the cash management rules, aimed at monitoring these deals. The rules came shortly after federal regulators found that one of the biggest players in the space wasn’t properly disclosing information about fees and features of their accounts.
One set of protections in the cash management regulations is focused on so-called Tier 1 agreements, or partnerships between schools and banks to offer accounts or debit cards on which schools deposit the financial aid dollars students might receive in excess of tuition. These accounts can’t have overdraft fees and need to provide students with reasonable access to ATMs without fees, among other provisions.
The other set of rules surround so-called Tier 2 agreements or deals between campuses and financial institutions where a company pays a college for the ability to offer and market a financial product directly to students. The regulations require colleges to disclose the details of these agreements.
‘Unholy alliance’ persists despite years of scrutiny
In the years since the Department passed the regulations, the CFPB, PIRG and other organizations have found that students who attend schools with one of these agreements in place tend to pay higher fees for financial products than those at schools without them, with some regulators describing them as an “unholy alliance” between companies and schools. In 2017, Seth Frotman, then the student loan ombudsman at the CFPB, resigned and on his way out accused the Trump-era agency of suppressing a report highlighting the millions of dollars in fees students using these products were paying to banks. Frotman is now back at the CFPB heading up its legal division.
Even after the years of scrutiny on these products, this month’s report makes “glaringly clear” that the cash management rules “are both insufficient and not being adhered to or enforced,” said Ben Kaufman, director of research and investigations at the Student Borrower Protection Center, a student loan borrower advocacy group.
“What we see in the Bureau’s findings is that yet again as is true year after year, schools are making backroom deals with massive banks and other financial institutions to extract hidden and unfair fee revenue from students with the schools getting kickbacks and the students generally being misled about what their options are and what kinds of fees they’re going to face,” he said.
Much of the agency’s report focused on the practices of BankMobile, which services about 70% of college-sponsored accounts that provide disbursement of financial aid funds in the CFPB’s sample. A BankMobile Vibe checking account held by hundreds of thousands of students charges a monthly fee of up to $2.99 if the balance falls below $300, but financial aid disbursements don’t count towards that $300.
“It’s alarming,” that a company providing these accounts would be charging among the top 10 highest fees, a CFPB official said. BankMobile account holders faced $27.31 in costs annually on average with customers of only one other bank in the Bureau’s dataset paying more, the report found.
In addition, students were offered this account through partnerships between BankMobile and their schools, despite the availability of other accounts on the market without these types of fees, including one offered by BankMobile itself.
A spokesperson for BM Technologies
BankMobile’s current name, wrote in an email statement that the company believes it’s in compliance with the Department of Education’s cash management rules “and remains committed and dedicated to offering an affordable student checking account.”
“BM Technologies is on a mission to provide affordable, transparent, consumer friendly banking to millions of Americans, and our student checking account offering supports this mission,” the statement reads.
The Bureau also found a wide range in the fees schools pay to companies in these tier one account partnerships and in the average fees students wind up paying on these accounts. The patterns observed by the agency in this data indicate that students of color and the schools that serve them appear to be at higher risk of facing harm from these products.
For example, Historically Black Colleges and Universities paid $3.65 per student on average to companies servicing their accounts, a rate that was more than two times the average of schools broadly, the CFPB found.
“That’s a red flag,” a CFPB official said. In addition, accountholders attending HBCUs and Hispanic-Serving Institutions paid more in fees on average than students at other schools pay.
Department of Education is upping scrutiny on the deals
These practices have persisted even though the cash management regulations have been on the books for years. But the Department of Education indicated that it’s also upping its scrutiny on these deals. The agency wrote in a blog post published this month alongside the CFPB report that it would “bring on additional staff” to monitor these agreements.
In addition, the agency wrote to colleges noting that officials will “monitor compliance and take corrective actions” to enforce the cash management rules when necessary.
“We are aware of certain practices that may pose risks or excessive costs to students,” the letter reads. “Institutions have a responsibility to protect their students when it comes to financial products.”
As part of the letter, the agency called out specific practices highlighted in the report, including telling schools that a policy requiring students to provide information about an existing bank account or open a new bank account “must not delay the timely disbursement of credit balance funds to students.”
Officials also wrote that colleges administering financial aid funds do so “as fiduciaries to their students,” — in other words they have a responsibility to ensure that the financial products presented to students are in their best financial interest. As part of that responsibility, institutions should be conducting due diligence to ensure that products offered to students don’t have fees and other costs that are out of line with what’s available on the rest of the market, Department of Education officials wrote.
The Consumer Bankers Association, a trade organization for financial institutions, has “long supported efforts to increase students’ access to a diverse array of products” and in 2015 worked with the Department of Education to develop rules surrounding them, Lidnsey Johnson, the group’s chief executive officer wrote in an emailed statement. “Making additional changes to alter the marketplace would threaten students’ access to safe, secure, and convenient banking options on campus,” the statement reads.
Kaufman, of the Student Borrower Protection Center, called the Department of Education’s blog and letter “a good start” in the government’s efforts to more closely scrutinize these agreements. Still, he’d like to see more, including the Department of Education using its leverage as the agency dispersing federal financial aid funds to ensure schools comply with the regulations and legal action by the CFPB against financial institutions accused of steering students towards products that aren’t in their best financial interest.
When asked whether the agency was considering supervisory or enforcement action over the practices highlighted in the report, the agency declined to comment “on any ongoing or potential supervisory or enforcement activity because it is confidential.”
‘Students as potential lifetime clients’
Despite the renewed focus on these arrangements, it could be difficult to ensure students are protected. Financial institutions are highly motivated to sign students up for their products because they’re early in their financial lives and may not yet have a bank or credit card of choice.
“You see students as potential lifetime clients, but you also see them as very unsophisticated financial consumers,” Mierzwinski said.
When these financial institutions partner with schools they gain access to that captive audience and schools may not have the time, expertise or motivation to negotiate these deals in a way to ensure they’re in students best interest, a CFPB official said.
“A picture of your bank that appears on your student ID card and your student ID card is also a debit card — that’s a piece of advertising that these companies want,” Mierzwinski said. The CFPB report found that some college websites are set up in such a way to imply that their student ID card, which could be connected to a specific company’s account, is the default or easiest way to receive financial aid funds.
Financial institutions “want to take the chance” that their practices might flout the cash management rules, “because there’s so much money to be made,” Mierzwinksi said.