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Prepaid cards are not all created equal

Tuition has been paid. Books have been purchased. The mini fridge, stocked with Red Bull, has been tucked into a corner in the dorm. But parents, there is still something your college student is going to need: spending money.

You want to make sure your kid can pay for everyday expenses, but it can be a challenge figuring out the best way to make that happen. Reloadable prepaid debit cards have become a popular choice in recent years, with banks and other financial companies ratcheting up the marketing to students.

The cards offer a simple way for students to manage money, without the threat of running up debt that could ruin their credit. If your child has $5 on a prepaid card, he only has $5 to spend, unless you’re feeling generous and send some money to add to the card.


Yet all prepaid cards are equal. Some come with all sorts of fees — charges to load money, activate the card, speak to customer service, or check the balance at an ATM — that could eat into the cash on the card.

And while the financial risks of a prepaid card are lower than a credit card’s, so are the consumer protections.

No federal law says prepaid card issuers have to disclose the full terms and fees. Nor are there limits on the fees. And unlike the debit card you get with a checking account, some prepaid debit cards are not backed by the Federal Deposit Insurance Corp., which covers up to $250,000. That means if your kid loses the card, your kid loses the money.

These days, however, the most onerous terms on prepaid cards are more the exception than the rule. Competition, especially from big banks like JPMorgan Chase and American Express, has driven down costs and pushed out some of the worst actors.


‘‘The landscape has become much more consumer friendly,’’ said Greg McBride, senior financial analyst at Bankrate.com. ‘‘There are a number of low-fee card options that have come into the marketplace, much more transparent fee structures. Many cards have just one flat monthly fee, which is much better than the prepaid cards from years past.’’

Nearly a quarter of US college students hold a prepaid debit card, according to Javelin Strategy & Research. Such cards make up a $5 billion industry that has experienced almost 30 percent annual growth in the past five years, according to the research firm IBIS World.

There are even 107 colleges, according to Javelin, that offer their own branded prepaid card, a practice that has gotten many in trouble. Regulators worry that schools are giving students biased information about products issued by financial companies that pay colleges to promote their cards.

The Credit Card Accountability, Responsibility and Disclosure Act of 2009 forced credit card companies to disclose contracts with colleges, but the law does not extend to checking account, debit, and prepaid card agreements. The Department of Education is in the midst of figuring out whether to rein in these campus cards. In the meantime, parents should read the terms of all financial products before signing up. And weigh what would work best for your kid.

‘‘You have to know your child. If they’re responsible, maybe a credit card is a better way to go. They can establish credit, build some financial responsibility,’’ McBride said. ‘‘On the other hand, a prepaid card can be advantageous in instances where the child has the tendency to overdraw a checking account or run up credit card debt.’’