Student Debit Card Issuer Generates Fees and Controversy

Higher One
Higher One

The explosion in student debt—more than a trillion dollars now outstanding—has been a huge boon to a Connecticut company that helps colleges and universities distribute loan proceeds to their students. But since CNBC first reported in 2010about questionable practices at Higher One , the company has found itself answering more questions—from students, regulators and members of Congress.

Founded in 2000 by Miles Lasater and Mark Volchek while they were still students at Yale, Higher One claims to serve more than half the higher education market, including more than ten million students on 1,250 campuses nationwide.

Higher One makes its money primarily by distributing excess financial aid proceeds to students in the form of a debit card. Fees from the debit card—some paid by cardholders and others paid by merchants who accept the card—generated more than 80 percent of the company’s $176 million in revenue last year, according to the company’s 2011 annual report. But those fees, particularly those charged to cardholders, have also generated considerable controversy.

A Higher One spokeswoman, Shoba Lemoine, attributed some of that controversy to what she called “an Occupy Wall Street sentiment” among students and the media. But the company has also been forced to defend itself before regulators, in the courts, and on Capitol Hill.

As we reported in 2010, some students objected to the basic principle of a third party collecting fees from money they borrowed to fund their education. But it is the size of those fees and how they are disclosed that has drawn the scrutiny of some in Washington. (Read More:The Debt That Won't Go Away)

While the company says the debit cards can be free of charge if the student uses them properly, and cites a study it commissioned showing its accounts are less expensive overall than a traditional bank accounts, some of the potential fees are considerably higher than many banks charge. They include $20 to replace a lost card, a $10 per month “abandoned account fee” if a student does not use his or her account for six months, and a 50 cent fee per transaction if the student uses the card as a debit card instead of a credit card when making a purchase.

The U.S. PIRG Education Fund singled out Higher One in a May reporton what it called “The Campus Debit Card Trap.”

“The financial results from Higher One provide only a window on the potential fee income firms can garner from partnering with universities, but the view it gives is clear: students pay a lot of money in fees when using these cards,” the report said, citing a Higher One-commissioned study showing the median cost of maintaining a Higher One account is $49 per student.

Higher One spokeswoman Shoba Lemoine told CNBC the authors of the report “do not have a real world understanding” of how college students and administrators operate. She claims Higher One worked with U.S. PIRG to develop a list of best practices and recommendations that ultimately were not included in a report she says the organization “rushed to put out.”

Nonetheless, the report drew additional scrutiny for Higher One on Capitol Hill.

“It’s unconscionable that an out-of-state financial institution is siphoning off students’ critical financial aid to pad their bottom line,” said U.S. Sen. Sherrod Brown, D-Ohio, Chairman of the Banking Subcommittee on Financial Institutions and Consumer Protection, who this month called on the company to improve its disclosures. (Read More:Student Loan Defaults Could Cost Taxpayers Dearly)

In a letterresponding to Brown, Higher One said it was dedicated to being “part of the solution of rising costs in higher education and not the problem.” The company says it helps colleges reduce costs by streamlining the financial aid disbursement process, and is working on improving its disclosures, which the company claims are already transparent.

But some of the changes follow regulatory pressure.

In August, Higher One agreed to a multi-million dollar settlement with the Federal Deposit Insurance Corporation. Without admitting or denying the allegations of unfair and deceptive practices, Higher One agreed to pay $11 million restitution to some 60,000 students as well as a $110,000 civil fine. The FDIC found Higher One was charging students multiple non-sufficient fund fees—as much as $38—for a single transaction, and allowing student accounts to remain overdrawn for long periods of time in order to keep collecting fees.

Under the settlement, Higher One was required to change its fee structure, and the company agreed “not to make misleading or deceptive representations or omissions in its marketing materials.”

Higher One says even before the settlement was finalized, the company had already voluntarily credited the fees back to what it calls “a small fraction” of its customers.

The company has also expanded its account offerings to include what it calls an “Edge” account that carries a flat, $4.95 per month fee.

“This is very unique in the market right now,” Lemoine said.

But some Higher One customers want more.

The company is battling three proposed class action suits by students and their parents alleging excessive fees, inadequate disclosures and deceptive marketing.

One of the suits, filed in July on behalf of four Mississippi college students, claims that students are essentially “forced” to open Higher One accounts, because the company requires students to go through multiple steps in order to opt out of the Higher One account to choose alternative ways of receiving financial aid proceeds such as an electronic transfer to a non-Higher One account or a paper check.

“The sole purpose of these practices is to maximize the amount of fees charged to college students while enrolled in school,” the suit says, “and to seduce students into a long-term banking relationship.”

Higher One, which has moved to consolidate all the cases in federal court, has said in court papers and SEC filings that it “vigorously” disputes the allegations and plans to fight them.

Lemoine says many of the claims in the suits are “simply not true,” such as the idea that financial aid refunds are “automatically deposited” in a Higher One account unless the student opts out. And she says, “Our fee disclosures are head and shoulders above other banks.”

While the company has not directly responded in court to the allegations in the lawsuits, co-founder and Chairman Miles Lasater defended the fee structure in a 2010 interview with CNBC.

“We believe that it is a good value for students,” Lasater said. “That’s what we hear from most of our customers, both the universities and also the students.”

Today, the company still contends it is helping solve the student debt problem instead of compounding it.

"Higher One moved financial aid refunds from a paper check system to an electronic system over a decade ago. Today, our solution is simple--we're providing students more choices to get their financial aid money faster, electronically and always free of charge,” Lemoine said.

Despite the controversies, Higher One continues to grow as cash-strapped colleges and universities look to the company to streamline their financial aid processes. The company boasts a ten percent increase in the number of debit card accounts in the past year.

But since we first reported on the company in 2010, its interactions with college administrators have taken on a somewhat different tone.

That year, Higher One’s annual conference for its users took place at the luxurious Meritage Resort and Spa in Napa, California. In addition to information and networking sessions, the five-day, $1,700 program included wine tastings and a dinner at an award-winning Napa Valley restaurant.

Next year’s conference is scheduled at the decidedly humbler Doubletree Hotel in Berkeley, CA.

This report is part of NBC News’ Education Nation initiative, engaging the country in a solutions-focused conversation about the state of education in America.

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—By CNBC's Scott Cohn