A recent post by Joanne Jacobs caught our attention here at Noodle. Jacobs wrote about a North Carolina college student named Marc Bechtel, who was suspended, then reinstated, over his outrage about the school's college ID.
Bechtel was angry because his school ID also doubled as a debit card. A debit card with some seriously high fees: a 50 cent charge for each "debit" purchase, a $2.50 ATM fee at any non-Higher One cash machines. And in case he thought he could just opt out by not using the card, the bank also charges at $19 inactivity fee per month beginning after the first 9 months of usage. His school was one of many in the last 6 or 7 years to sign a contract with Higher One Inc., which allows a school ID to double as a debit card.
So how does it work?
These cards are also known as "loan cards" and they allow students to spend the money from their student loans that's left over after the school's tuition is taken out.
Brent Hunsberger of The Orgeonian writes in his column "It's Only Money:"
"This official student photo ID is branded with the MasterCard logo. It can double as a debit card. Students can have their financial-aid refunds -- the money leftover after the school deducts its tuition and fees -- automatically deposited into a bank account linked to the card. They can then tap the money at an ATM or wherever a merchant takes MasterCard.
School administrators sing the company's praises. They save the cost of processing financial-aid checks. Students get aid for books and living expenses more quickly. International and unbanked students get access to a bank account instead of having to use costly check-cashing stores. "The students love it," said Helen Garrett, Lane's executive dean of student affairs."
But students don't seem to love it and neither do their parents. One father started a Facebook page called "Ignore the Higher One debit offer" after his son received a Higher One card in the mail before fall semester.
In fact, according to their annual statement, Higher One made $145 million in profits in 2010, of which 78% were from "interchange fees, ATM fees, non-sufficient funds fees, other banking services fees and convenience fees."
Like most banks, they charge some pretty significant fees for those who overdraft their account or deposit a check into their account that bounces. But the strangest fee of all is the 50 cent "debit swipe" fee. This fee occurs when a student uses their card as a debit card, entering in their pin number, as opposed to using the card as a credit card and signing their name.
"Why does Higher One do this? The company says "credit" is safer -- backed by MasterCard's fraud protection plan. Payment experts, however, say that fraudsters don't hack PIN-debit transactions as often as signed-debit transactions.
The other reason: Higher One brings in more money when the card is run as "credit" and signed.
Swipe fees paid by merchants for these so-called signature debits are much higher -- an average of $1.70 for every $100 charged, according to research by Federal Reserve Board economist Fumiko Hayashi. Swipe fees on PIN-entered debit purchases average closer to 70 cents per $100, Hayashi found.
The latter, obviously, costs less for the merchant. But it's also less money for Higher One's costs and profits. Higher One makes up the difference with the 50-cent fee.
Higher One also offers the schools incentives to push swipe-and-sign. It gives each school a cut of the higher credit swipe fee -- about 10 cents per $100, according to the contracts. It also rewards them based on how much students deposit into Higher One's bank accounts.
These fees obviously sustain Higher One. Last year, it took in $66 million on merchant swipe fees, ATM fees, overdraft fees and student "convenience fees," the company says. It did so well last year, the company handed out $1 million in bonuses to employees. In June, it raised $38 million in a public stock offering on Wall Street.
Meanwhile, some students pay Higher One's bank fees with borrowed money, often at 6.8 percent interest. That $19 inactivity fee will cost a student with an unsubsidized Stafford loan $37 over 10 years, according to my calculations.
On the other hand, Higher One does save schools money.
According to a recent article, Western Washington University saved $13,000 last year by using Higher One checks to deposit and refund financial aid funds, as the bank does not charge the university for checks. Higher One also recently began a Financial Literacy Grant program, which distributed $30,000 in funding to 8 different colleges and universities to help them begin Financial Literacy programs for their students. Their site features a very clear list of (pretty steep) fees for each of their cards and advice on how to avoid these fees.
The real question is whether students will actually read this list or pay attention to their statements. Deciding to sign up for a checking or credit card account is typically taken with more care and attention than receiving the mandatory student ID with a mysterious MasterCard logo in the corner. It's not uncommon for student IDs to be used as debit cards at the school bookstore or student center, but debt owed to your college is not quite the same as the debt owed to an outside bank and students ought to take heed.
In the end, if nothing else, the student loan card is an educationally potent lesson in how important financial literacy really is.
The question of student loan cards is a complicated one and we want to hear what you have to say. Does your school use a Higher One ID card or have you had any experience with one?