Column: Colleges still profiting from student banking

Christopher Hopkins
Christopher Hopkins

It is hardly a secret that many young people entering college find themselves in financial difficulty due to a lack of financial literacy. So, it may come as a surprise that many schools profit by partnering with banks and lenders to push financial products to students that are often more expensive than open-market alternatives but generate big fees for the schools.

The latest annual report to Congress from the Consumer Financial Protection Bureau found the hundreds of partnerships between financial institutions and universities generated millions of dollars in revenue for the schools and fees for the banks, often saddling students with higher costs than noncollege banking products and sometimes using email and online advertising that can be misleading or deceptive. Students and their parents need to appreciate the symbiotic relationship between schools and banks and make smart decisions when offered a college-sponsored account or credit card.

Educational institutions have long profited from arrangements with financial product marketers. Credit card issuers understand the lucrative benefits of being on the spot when a student opens their first account and are willing to pay colleges for access. Prior to 2010, students on campus were plied with swag like Frisbees, T-shirts and pizza parties as incentives to apply for an account, and many young borrowers with little credit experience ended up saddled with debt for years. Universities were only too happy to make the introductions, raking in nearly $85 million in cash payments from credit card companies in 2009, the equivalent of $125 million in today's dollars.

Congress finally stepped in to pass the Credit Card Accountability, Responsibility and Disclosure Act of 2009 that ended aggressive in-person credit card solicitations and restricted eligibility for people under 21 without verifiable outside income. The act reduced the most egregious exploitation and mandated that the Consumer Financial Protection Bureau submit annual reports to Congress. The 2023 report showed progress but also noted colleges still profit from banking arrangements that sometimes mislead students or entice them into more expensive relationships.

Let's start with bank accounts. Federal financial aid represents a colossal transfer of funds each year. In 2022, 5,500 schools received over $110 billion in financial aid covering 10 million students. Once the school has extracted tuition and fees, any excess loan funds are disbursed to the student to cover other expenses, including room and board or supplies. Many colleges then subcontract with third-party banks to handle these transactions, and in the process, offer to set up student deposit accounts known as "college banking arrangements." For the 2021-22 academic year, 653,000 students had active deposit accounts that were offered to them by their schools, sometimes linked to their student ID cards to serve as debit or prepaid credit cards.

Banks offering student accounts paid the schools $19.2 million to pitch accounts to students last year. Meanwhile, the financial institutions generated $15.7 million in fees from those accounts and gained coveted access to future graduates as their incomes rise. And while students are not required to open an account with the disbursing institution and can use any bank they like, the imprimatur of the university is often perceived as an endorsement of the bank or sometimes perceived as a requirement.

The Consumer Financial Protection Bureau found once again that these campus accounts often imposed higher fees and expenses than comparable private sector bank accounts, including overdraft fees as high as $36 that most large institutions have reduced or eliminated. In some cases, additional monthly maintenance fees were imposed for using student ID cards to withdraw funds. Banks sometimes assessed dormant account fees or additional levies when a student graduated or reached a certain age, and some even charged processing fees to deposit the financial aid into student accounts. Students at historically Black colleges and universities and schools serving predominantly Hispanic populations paid even higher fees on average.

Credit card marketing also remains problematic despite progress under the Credit Card Accountability, Responsibility and Disclosure Act. Partnerships between credit card companies and universities or university-affiliated groups like alumni associations have become somewhat less profitable but still generate revenue for the schools.

The Consumer Financial Protection Bureau reports over 532,000 open credit card accounts under 143 different partnership agreements with 35 issuers in 2022, generating $19.6 million in profit to the colleges and affiliates. The largest single partnership involves Penn State Sports Properties, the marketing arm of Penn State University athletics, which received $2.5 million from the Pennsylvania State Employees Credit Union in 2022. The Nittany Lions also garnered second place with a $1.5 million deal between the credit union and the Penn State Alumni Association.

While building credit as a college student is important, it also bears noting that first credit card can be a two-edged sword. According to the U.S. Department of Education, nearly one third of all college students use credit cards to pay part of their fees and tuition, and the average student carries a $4,000 balance, incurring significant additional interest expense. Given the recent sharp increase in card balances and a marked uptick in delinquencies, the aggressive promotion of retail credit cards by universities may not truly comport with schools' obligation to act in the best interest of their enrollees.

These partnerships have become less lucrative and subject to more oversight but remain a nontrivial profit center for many institutions of higher learning. Students should shop around for the best bank account or credit card and recognize that the alma mater may have a vested interest.

Christopher A. Hopkins, a chartered financial analyst, is co-founder of Apogee Wealth Advisors.

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