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Financial Services Law Insights and Observations

CFPB report analyzes college banking and credit card agreements

Federal Issues CFPB Consumer Protection CARD Act Congress

Federal Issues

On December 19, the CFPB released a report titled College Banking and Credit Card Agreements: Annual Report to Congress, which found that some college-sponsored financial products marketed towards students have less advantageous terms and conditions, and higher fees compared to typical market products.

According to the report, when colleges decided to subcontract with third-party financial service providers to facilitate the application of federal financial aid, they entered “college banking agreements” offering deposit accounts for students, which can function as debit or prepaid cards. The report distinguished between colleges that pay for certain service providers to facilitate the processing of federal financial aid disbursements (referred to as Tier One college banking arrangements), and colleges that are paid by certain service providers to offer deposit accounts and prepaid cards to the student population (referred to as Tier Two college banking arrangements). Tier Two account issuers paid colleges an aggregated of over $19.6 million in 2022. The CFPB observed that some colleges’ financial product partners charge students overdraft fees, despite the general industry trend to move away from such fees.  The CFPB also warned in its report that certain overdraft fees can violate the CFPA.

The report also found that students at HBCUs and Hispanic-servicing institutions on average pay higher fees per account. The CFPB also noted several other additional fees charged to students by financial institutions, including (i) dormant account fees; (ii) deposit and withdrawal fees for student ID cards that also function as prepaid cards; and (iii) “sunset” fees imposed on students to pay after graduation or reaching a certain age.

Regarding partnerships in credit cards, the CFPB noted that although the passage of the CARD Act reduced the profitability of marketing credit cards on college campuses, thousands of new accounts between colleges and credit card issuers are opened every year. The CFPB also noted that college students maintain a high level of reliance on credit cards to cover costs and it indicated that it “will continue to research evolving practices” to understand how credit cards are being marketed to college students.