CFPB Student Scorecard Offers Much-Needed Reforms

Many colleges partner with banks to offer their students special accounts through exclusive bank-school marketing arrangements. Unfortunately, the benefits afforded to students through these accounts are grossly overstated, while the potential harm the arrangements cause can be significant.

The Consumer Financial Protection Bureau's "Safe Student Account Scorecard" initiative should help resolve the problem. While Wayne Abernathy criticized the initiative in a BankThink opinion piece last week, its purpose is simply to help colleges negotiate with banks that want to offer accounts to college students.

In recent years, the numbers of bank accounts and prepaid cards offered to students through partnerships with colleges have flourished. In fact, the Government Accountability Office estimates that 40% of college students attend a school with one of these marketing arrangements. Product offerings typically take the form of an all-in-one student ID and debit card, co-branded with the logos of the school and bank.

Proponents of these partnerships contend that students reap benefits from the account offerings. They note that if student accounts weren't available, young people might instead have to turn to expensive check cashers to access their financial aid disbursements and conduct their everyday transactions. They also point to the fact that many of these accounts are "free" or carry only limited fees.

Meanwhile, critics worry that the accounts fail to serve the best interests of students. Instead, the partnerships with banks sometimes allow schools to market accounts to students in return for a portion of the revenues generated from these products.

One problem with the student accounts is that the vast majority of students do not need their schools to help them access banking services. Less than 1% students are actually unable to open a bank account on their own, according to a recent CFPB analysis. Most can simply shop around for the best option. Therefore exclusive deals with schools can actually limit consumer choices by providing a significant marketing advantage to a single financial institution.

Another major issue is that, according to a review by the GAO, the student accounts available through college-bank partnerships are often no better than the products (and accompanying fees) available elsewhere.

Take, for example, the costly overdraft fees that can be assessed on student accounts. The CFPB and the Federal Deposit Insurance Corp. have found that young adults are more likely to incur overdraft fees than older account holders. These fees, which average $35 per incident, are often triggered by small debit card purchases or ATM withdrawals.

These are transactions that banks could otherwise decline without charging a fee. With some notable exceptions, many student bank accounts currently offered through school-bank partnerships allow students to incur hundreds of dollars in overdraft fees every day — along with additional "sustained overdraft" fees if the balance is not promptly repaid.

The CFPB is right to provide needed advice to schools that are not experts in the delivery of financial services. This way, schools that are determined to offer student accounts can be sure they are offering products that prioritize their students. We applaud the CFPB's counsel that schools should favor accounts without overdraft fees.

It is also worth noting that there is precedent for college oversight of the features of financial products offered to students. Current law requires colleges to vet private student lenders, which must offer their students a demonstrable benefit in order to be included on a preferred-lender list the school provides to students.

The Department of Education can further address this issue by finishing the rulemaking process begun last year to enact greater consumer protections for these types of accounts when they are offered to students in accordance with an exclusive marketing deal or during the financial aid disbursement process. Existing rules already bar these types of accounts from having credit features, so the Department should clarify to banks that overdraft coverage is indeed an extension of credit. At the very least, the Department should not allow banks to charge students overdraft fees on debit card transactions that could be readily declined. 

Leslie Parrish is the deputy research director at the Center for Responsible Lending.