WASHINGTON — Federal officials and lawmakers have launched a broad review of the way hundreds of millions of dollars in federal aid for college are being funneled through banks and financial institutions, some of which charge an array of fees to students.
It has become increasingly common for colleges to allow banks to handle the disbursement of financial aid, which saves money for the schools. But consumer advocates and some members of Congress worry that the savings come at the expense of students.
Instead of hiring bursars to distribute thousands of checks at the beginning of each semester, colleges are partnering with companies that transfer onto debit cards the money from student loans and grants leftover after tuition is paid.
Many students say they find the debit cards, co-branded with their school’s logo, to be a faster and more convenient way to receive their remaining financial aid, often used to buy textbooks and pay for living expenses. But some lawmakers said many students are unaware of fees that can accumulate, including ATM charges.
“The bottom line is you have all these new students coming in and the banks start drooling, seeing them as permanent cash cows,” said Representative Peter Welch, a Democrat from Vermont, who has called for an end to these practices.
Access to federal financial aid is supposed to be free under Department of Education rules. But there is little regulation around student debit cards to ensure that happens.
Banks and other financial institutions controlled or influenced the financial-aid disbursement for more than 9 million students — or 42 percent of all students nationwide — through debit cards or student ID cards linked to checking accounts during the 2011-12 school year, according to a 2012 report by the US Public Interest Research Group.
The Consumer Financial Protection Bureau, a federal agency, has launched an inquiry at the urging of Congress and will hold a hearing on Monday to discuss its initial findings. The Department of Education also plans to discuss the issue during its upcoming rule-making process.
“With student loan debt topping a trillion dollars and college becoming increasingly unaffordable, unnecessary fees can add insult to injury,” said Rohit Chopra, student loan ombudsman at the Consumer Financial Protection Bureau. “Too often students are surprised by the fees that they incur when using financial products that their schools endorse.”
Debit cards contracts are the latest way that banks are tapping the lucrative college market, after the recent crackdown on the marketing of credit cards and student loans to college students.
Representative George Miller, a Democrat from California, and Senator Dick Durbin, an Illinois Democrat and assistant majority leader, have called for federal investigations into the relationships between financial firms and more than 900 colleges and universities that offer bank-affiliated student debit cards that the lawmakers say eat away at student aid funds.
The largest player in the campus financial aid disbursement industry is Higher One, a New Haven-based company that handles disbursements for more than 600 colleges across the country, including Bunker Hill, Bristol, and Mount Wachusett community colleges in Massachusetts.
A Higher One representative said students always have the option to choose how they want to receive their money, but debit cards, which students must choose to activate, are the fastest way.
In public comments submitted to the consumer bureau, students described the difficulty of accessing a Higher One ATM on many campuses. Some are located in buildings that are locked after business hours. Lines are often long at the start of the semester when financial aid is disbursed, and the machines can run out of money — leaving students little choice but to use an outside ATM and incur fees.
Higher One’s website lists seven free ATMs in Massachusetts.
Kaitlyn Burke, a senior at Rhode Island College, which partners with Higher One, said in an interview she would like easier access to her federal loans.
Burke, 22, said Higher One charged her a $25 fee over the summer to use the financial aid loaded onto her debit card to pay for a class, because she needed the money in the form of a check.
“It’s really frustrating because they’re charging me extra to access the money I have already been given,” she said.
A Rhode Island College spokeswoman said that the school is transitioning to a new Higher One contract, under which students will be able to use their debit cards to pay school bills for free beginning the spring 2014 semester.
Shoba Lemoine, a Higher One spokeswoman, said only 1 percent of students are ever charged the type of fee that Burke paid, known as a cash advance. “This is an easily avoidable charge," Lemoine said.
Lemoine said Higher One complies with all federal regulations and has changed its payment structure over the past year, eliminating some of its fees. Many of the fee changes were prompted by a 2012 settlement with the Federal Deposit Insurance Corporation, which determined that the company had inappropriately charged students who had overdrawn their accounts.
Lemoine said the company no longer charges overdraft fees for debit card transactions and has discontinued fees for inactive accounts. It has also expanded its ATM network to include 38,000 ATMs nationally, but only students who open a checking account with a $5.95 monthly fee can use the ATMs free of charge. If a Higher One ATM runs out of cash or is inoperable, the company will reimburse students for fees charged for using other ATMs.
“We want to be very transparent. We have no hidden fees,” Lemoine said. The company requires students to review a one-page fee schedule before opening an account, in addition to providing students with instructions on how to avoid any charges, she said.
Higher One generated $142.5 million, or 80 percent of its revenue, from fees associated with student debit cards in 2011, including fees charged to merchants, according to its Securities and Exchange Commission filings analyzed by the Public Interest Research Group. Lemoine said student fees accounted for less than 50 percent of company revenues.Tracy Jan can be reached at firstname.lastname@example.org.