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New tactics keep college kids hooked on plastic

Robert Llewellyn | Photolibrary | Getty Images

Talk about learning a lesson the hard way.

William Campbell first learned of his university's new system for sending out financial aid refunds during the summer of 2011.

Campbell recalled that he received a "fancy little letter" from Western Washington University's financial aid office and a company called Higher One. The letter informed Campbell that Higher One would be handling the disbursements via a new debit card.

What happened next was disturbing, Campbell said in comments before a Consumer Financial Protection Bureau panel on Sept. 30.

"You are given this card that every student has to use, whether you want disbursement to a Higher One account or elsewhere," he said. "You go to the Higher One website, and you can choose a Higher One account. It takes three clicks," and the graphics are bright and shiny.

"If you don't choose Higher One, it's double the clicks, much more drab, and harder to find," Campbell added. "It is intended to be difficult."

More than 80 percent of Western Washington students signed up for a Higher One account, said Campbell, a student senator at the university. The No. 1 reason they gave was that they thought it was required. In addition, he said, high fees and inadequate customer service made the accounts a bad deal.

Last year, Higher One reached a settlement with the FDIC over what the agency called "alleged unfair and deceptive practices in violation of Section 5 of the Federal Trade Commission Act."

(Read more: Student debit card issuer generates fees and controversy)

Communications director Shoba Lemoine said Higher One has since eliminated 10 different fees on its accounts, only one of which was requested by the FDIC, and paid restitution to customers. The company has a 99 percent retention rate with the schools it serves, she said, adding, "we've always been very transparent and student-friendly."

Higher One is far from the only company in the business of bringing plastic to campuses, even in the wake of the Credit Card Accountability, Responsibility and Disclosure Act of 2009, which curbed improper marketing of credit cards to students.

Credit cards are less ubiquitous than before the CARD Act was passed: A survey by Sallie Mae and Ipsos found that just 30 percent of students now use credit cards, versus 42 percent in 2010.

But debit cards are much more common, with nearly 80 percent of students carrying them, the Sallie Mae survey found. Those cards sometimes are on the back side of a student's ID card. Prepaid cards are also gaining favor, partly because they enable parents to control their children's spending. The problem is, those cards don't allow students to build a credit record, and they have fewer marketing restrictions.

(Read more: Credit cards for college kids? Pick your poison)

A study by U.S. PIRG found that "in the wake of restrictions to credit card marketing and student loan reform, the next financial frontier for banks and financial firms has been that [of] growing business of marketing campus debit and prepaid cards and offering incentives to schools to outsource or privatize various financial and administrative functions."

(Read more: Should college students have credit cards?)

The Ohio State University is a case in point. Last year it signed an agreement in which Huntington Bank agreed to pay the school $25 million upfront and commit another $100 million in loans and investments for campus projects in exchange for becoming OSU's "official consumer bank."

Huntington also gained access to a database of about 600,000 people with a connection to the university, which receives incentive payments when people sign up for accounts.

OSU Chief Financial Officer Geoffrey Chatas called the agreement "a true win for students, faculty and staff." And the undergraduate student president, Nick Messenger, told The Columbus Dispatch that the account terms looked very competitive.

That may be, but members of Congress have voiced concern that many banks are not offering the best terms in these campus deals. Several Democratic members of the House and Senate sent a letter late last month to several banks with campus deals expressing concern about who benefits from those deals and asking for details.

But competitive terms aren't necessarily the point, according to Meghan Johnson, a sophomore at Iowa State University. Johnson chose not to switch from her old bank account to one with U.S. Bank, which has a partnership with ISU.

"I remember feeling almost obligated to, though, at my orientation," she said. "We even went to kind of a meeting about it and they told us all the benefits."

Johnson says the terms of the U.S. Bank accounts are "not the worst thing in the world," but colleges and universities have their priorities wrong.

"Credit cards and debit cards are not essential to the learning that we came to campus to do, so why are colleges offering them?" she said in comments to the CFPB panel. "We are at college to learn and to better ourselves for the future, not to be marketed to by banks and credit card companies."

—By CNBC's Kelley Holland. Follow her on Twitter @KKelleyHolland.

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