Financial Institutions Told to Halt Overdraft Fees on College Cards

October 29, 2015, 8:00AM. By Heidi Turner

Washington, DCHoping to protect college students from excessive overdraft fees and other banking practices that would push them further into debt, federal regulators have finalized regulations that should help them keep better control of their money. The rules affect students who have bank accounts with financial institutions that have ties to educational institutions.

According to a news release from the Department of Education (10/27/15), the new regulations will help students who have college debit or prepaid cards. The Department of Education, citing information from the Government Accountability Office and the U.S. Public Interest Research Group, notes that institutions enrolling around nine million students have agreements with financial institutions offering debit or prepaid cards, with almost $25 million in Pell Grant and Direct Loan funds released to such accounts.

Among the new regulations is a rule requiring institutions to “ensure that students are not charged excessive and confusing fees (e.g., overdraft fees and transaction-swipe fees) if a student selects an account offered directly or indirectly by contractors that assist institutions in making direct payments of Federal student aid.” Additional regulations include requiring institutions to give students more choice about how they wish to receive student aid and prohibiting institutions from requiring parents or students to open certain accounts into which student aid refunds are deposited.

In its news release, the Department of Education noted that a report from the Department Inspector General found evidence that some students incur unreasonably high fees as a result of using preferred accounts that they have been persuaded to use by third-party service providers, resulting in a loss of federal student aid funds. The same report noted that the total fees students pay on college debit or prepaid cards is not known, and some providers “declined or said they were unable to provide these data to GAO.”

The new rules will take effect in 2016.

Banks, credit unions and other financial institutions have come under fire in recent years for allegedly using unfair and excessive overdraft fees to drive consumers into overdraft more quickly. Various financial institutions have faced lawsuits filed by consumers alleging the institutions unfairly reordered debit transactions from highest to lowest to push consumers further into overdraft and maximize profits from overdraft fees.