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Overdraft U: Student Bank Accounts Often Loaded with High Overdraft Fees

March 27, 2015
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Some colleges and banks enter into exclusive agreements to offer students checking accounts – usually these accounts come furnished with a debit card that prominently displays the school logo and can sometimes be used as student ID.

For banks, these exclusive agreements mean a captive audience for their bank products (checking accounts, credit card accounts) and usually a customer for life. Studies suggest that banks are a "sticky" product – once a consumer chooses one, they're unlikely to change.

For colleges, these exclusive agreements mean increased revenue. These partnerships may include revenue sharing (based on the number of accounts opened by their students) and/or in-kind benefits (like the bank offering to manage the school's financial aid disbursement).

The benefits to students are unclear at best. Some schools negotiate for some reductions in up-front costs (like waiving monthly maintenance fees), but – as this report shows – many of these accounts do not have better terms than what a student could find on their own.

Download the executive summary of the report. (PDF)

Major Findings

  • Many student bank accounts have abusive overdraft features that are no better (and sometimes worse) than what students could find on their own.
  • Young adults are more likely to overdraw their accounts. These overdrafts are both expensive, often $35, and easily preventable by the bank, which could simply decline the transaction.
  • The heaviest student overdrafters are at risk of paying more in overdraft fees with many of these accounts within a year than they will pay for textbooks and other course materials – about $700.

Policy Recommendations

The CFPB and Department of Education are examining how to better protect students who have these types of bank accounts. We urge them to take swift and strong action to protect students from abusive overdraft practices.

The CFPB has released a draft "Safe Student Account Scorecard" that can be used by colleges to negotiate better terms when entering into partnerships with banks. The draft calls for no overdraft capacity on these accounts. They are taking feedback on the draft scorecard until Monday, March 30, and we urge them to include a ban on overdraft fees in the final version.

The Department of Education is in the process of updating its "Cash Management" rule which includes requirements and consumer safeguards which must be in place when these types of accounts are offered for student financial aid disbursements. We urge them to--at a minimum--not allow banks to charge overdraft fees on transactions which could simply be declined at no cost to students. We expect a proposed rule on this subject to be issued soon.