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College-bank partnerships aim to help students—but the products can be costly

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Colleges and universities have, for a long time, partnered with banks and credit unions to provide financial services like checking accounts and credit cards to students.

But regulators and consumer advocates have concerns about whether these services are actually helping students' financial health.

The products often come with perks like the ability to use student ID cards to spend funds on campus and at local businesses, but regulators say many of these partnerships are leading students to costly products, like accounts with higher or more frequent fees than market standard.

In a report released earlier this month, the Consumer Financial Protection Bureau found a number of issues, from which products are advertised to students to disclosures schools should be posting. 

Students trust their academic institutions to help them make decisions

One of the main concerns the CFPB cited is the way colleges seem to endorse financial products without encouraging students to do their homework and determine if the services advertised are the best fit. While the school may not compel students to use a certain service or provider, by promoting a certain financial institution, students may rely on the university's endorsement. 

The Department of Education provides regulation for these arrangements to help ensure colleges are acting in students' best interests when entering into these partnerships. It defines two different types of partnerships:

  1. Tier 1: Schools typically pay financial institutions to support financial aid and other disbursements from the school to students.
  2. Tier 2: The financial institutions usually pay the schools to advertise general products like checking accounts and credit cards for any interested student.

Students with demonstrated financial need may feel more pressure to open one of these costly accounts because the Tier 1 agreement means their school advertises the accounts as a method to receive aid. Students are able to receive aid in existing or other accounts, but partner financial institutions may advertise time-based incentives to lure students, a CFPB official told CNBC Make It.

"They say, 'Do you need your money? Do you want to get it one or two days faster? We have a product for you,'" the official said.

As a result, students have been subject to higher and potentially more frequent fees than they would incur with a different account or product from a comparable financial institution, the CFPB found.

"We have been seeing a shift in recent months and years away from some of the fees that we still see assessed on these college products," a CFPB official said. "If you look at the top banks in the country, a majority of them don't charge non-sufficient [funds] fees anymore. And yet, we see them assessed on some of these college banking products."

Additionally, the agency found around a third of schools that should have clearly publicized payments received from partner banks did not.

Advocates have previously called out high fees for college-backed accounts

This is not a new issue. The Education Department regulations state that schools must present students with a neutral list of options for accounts and methods to receive financial aid disbursements. However, both the department and CFPB have found problems in the way school-sponsored products are marketed, which led to federal regulation for these partnerships in the first place, back in 2015.

Students across the country paid $24.6 million in fees related to campus debit card accounts over one contract year, a 2019 study from the Public Interest Research Group found. And students at schools with a paid marketing agreement with a financial institution paid 2.3 times as much in fees as students at schools without such agreements, the report found.

In response to the CFPB's recent report, the Department of Education issued additional guidance for educational institutions, reiterating its own rules on partnership disclosures and insisting that schools put students' financial health first when it comes to advertising financial products.

The department plans to continue to monitor college banking partnerships and work to improve the reporting process to make it easier for schools to disclose arrangements. 

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