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While college credit cards with bad terms may be disappearing from America’s college campuses, many are simply being replaced with debit cards that come with hidden fees and other booby traps, regulators warned Wednesday.
The Credit CARD Act financial reform bill passed by Congress in 2009 placed strict regulations on how credit card issuers could market their accounts on college campuses, and the kinds of agreements issuers could arrange with schools. But the law did not cover debit and prepaid cards, which are often used to disburse financial aid or other college-related funds. As they have become more popular — more colleges have debit/prepaid agreements than credit card agreements now — abuses have become more common.
The Consumer Financial Protection Bureau announced the creation of a “Safe Student Account Scorecard” on Wednesday as an effort to bring more transparency to debit and prepaid cards. Schools can ask financial institutions to fill out the scorecard, which include details on various fees and other costs. The scorecard is voluntary, because the CFPB has no authority to force it on schools or issuers.
“Financial institutions have engaged troubling practices,” CFPB director Richard Cordray said. “More recently, both the FDIC and the Federal Reserve have identified serious illegal conduct by providers of student debit cards.”
Abuses include policies that nudge students toward repeated overdraft fees.
Rohit Chopra, who runs the CFPB’s student loan monitoring program, warned that what’s happening in the college prepaid and debit card market bears an “uncomfortable similarity” to abuses that occurred in the student loan market last decade. Students who sign up for school-branded prepaid cards often find terms that are inferior to those of similar prepaid cards on the open market.
“You would think when colleges negotiate with financial institutions, they would get better (terms) than are generally available,” Chopra said. “We’re not finding that.”
Some schools may not know the right questions to ask of potential financial partners, Chopra said. He hoped the scorecard could be used as a negotiation tool. Scorecard responses, which will also include the financial incentives offered to the college for signing the agreement, may or may not be made public, the CFPB said.
“There is very little data available (about college debit and prepaid cards) and in some ways that’s what troubles us about this market,” he said.
Financial institutions and others are invited to comment on the scorecard until March 15. According to documents made public on Thursday by the CFPB, the scorecard will include:
Many students opt for debit cards or prepaid cards because they can’t qualify for a credit card due to their limited or non-existent credit history. These cards do not help students build their credit, however. If you’re a student wondering if you can qualify for a credit card, you’re entitled to free annual copies of your credit reports (if they exist). You can also check your credit scores for free on Credit.com.
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