The offer can be enticing for college students with little to no credit and a need for extra cash: a $1,000 credit line with cash-back rewards and no annual fee. So they apply and receive their first credit card, which feels empowering.
But a year later, after exhausting their limits and their borrowing options, students have balances they can’t pay off. They make minimum payments instead, and interest compounds as debt piles up. It is hardly the scenario they envisioned when they entered into those “worry-free” contracts.
For decades, financial institutions have pitched credit cards and other products, such as loans, to students as a way for them to build credit or get access to money. But those deals often include terms that students may not fully comprehend, such as APRs that can top 20%. Although a select group of businesses enjoys the right to extend credit on campuses, two federal agencies say colleges and universities have an ethical obligation to students to ensure that their arrangements with those institutions are in their best interests.
To that end, the Consumer Financial Protection Bureau and the Department of Education each issued releases over the past week urging institutions of higher education to be warier and more transparent in agreements with third parties and deals they promote to students. The Department, which submitted its own report to Congress, said it will be monitoring them in the years ahead.
“While colleges have the substantial bargaining power to obtain superior terms and pricing for their students, we find that many college-sponsored financial products cost students more than accounts that are readily available on the open market,” said Rohit Chopra, director of the Consumer Financial Protection Bureau. “There is more work to do to ensure that students are not steered into school-endorsed products with junk fees. We will continue to work with the Department of Education to help students find the best possible products.”
Although there aren’t a great number of banks, credit unions and companies working with colleges, they nonetheless offer an array of products to entice students to borrow that also include prepaid and debit cards.
“These partnerships often claim to support students’ financial health,” the CFPB notes, but many don’t do that. In its report, which looked at 11 account providers and 650,000 accounts that students had opened, the CFPB said both companies and their partnered colleges often “promote more costly products to students than are otherwise available in the market.” One result of those arrangements that can hurt students, but isn’t prominent in pitches, is overdraft fees.
Cards are not the only concern. The arrangements colleges have with financial aid providers can harm students and families if they are not transparent. For example, CFPB notes that the major provider of aid in the U.S. levies fees on accounts where only limited deposits are made. IHEs also unknowingly may be steering students to “college-sponsored” accounts that aren’t necessarily the fastest in getting financial aid payments disbursed. And they may not be clearly telling students that they are receiving terms prominently or clearly to students where they accept payments from those institutions in return for promotions.
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“Schools are required to post on their websites the agreements they have with financial services providers, any compensation exchanged between them, and the average costs paid by students,” the CFPB notes in its report. “The CFPB’s review found that hundreds of schools did not appear to have posted the disclosures in the public and conspicuous manner required.”
In its letter to institutions, ED said it would be more closely tracking arrangements with banks, credit unions and other financial entities. In addition to overseeing transactions and transparencies to ensure that students are in fact seeing and getting the best rates with limited fees, it also will be working with the CFPB to provide best practices to colleges in the future.
