When Your College ID Is Also Your Debit Card, Beware of the Fees

Many college students are losing hundreds of dollars of their student loan funds to debit card overdraft fees, a new report on school-offered debit cards concludes. The Center for Responsible Lending analyzed exclusive debit card partnerships between several large universities and banks to see how these products affect students, and the findings suggest students might be better off getting banking services elsewhere.

Despite the fact that students can choose other options to receive their student loan disbursements (what’s left over of their loans after the school has taken what it needs for tuition and fees), between 70% and 80% of students opt for co-branded debit cards, the report says. The cards often double as a student ID, and they’re marketed as a way to make a student’s life a little simpler.

That simplicity has a price tag. Based on the overdrafting habits of 18- to 25-year-olds, nearly 40% of students with debit cards offered jointly by their university and a bank will incur an average of $67 to $710 in annual overdraft fees, depending on how often they spend more than they have in their accounts. In some cases, overdraft fees can exceed $100 a day.

Consumers 25 years old and younger are at particularly high risk of overdrafting their checking accounts, because they are least familiar with the banking instruments and tend to have lower account balances than people older than they are, according to research by the Consumer Financial Protection Bureau. Among 18- to 25-year-olds, nearly two in five (38%) overdraft their accounts, and 11% do it more than 11 times per year.

Schools and partner banks say part of the reason to offer these debit cards is to give banking access to students who couldn’t otherwise acquire it, presumably forcing them to use costly check-cashing services to get their student loan disbursements. The report points to a survey that says less than 1% of college students have a poor banking history that would prevent them from getting a checking account (compare that to the 70% to 80% student card adoption rate). While most students have many options for banking services, the ones offered by their schools may seem most appealing.

With the co-branded debit cards offered by many universities and banks, that 11% of students who overdraft at least 11 times a year pay an average of $710 in overdraft fees annually. That’s more than half of what a student needs to pay for an average year of textbook costs ($1,200, according to the College Board). The Center for Responsible Lending’s research found that these accounts are just as costly, if not more costly, than checking accounts students could get at other banks.

Meanwhile, those hundreds of dollars going toward fees are accruing interest, because it’s student loan money. Overdraft fees may end up costing students thousands of dollars by the time they repay their loans.

All-in-one ID/debit cards may be a great option for a student looking to open a bank account, but it’s important to know how much a product might cost you — that’s true of all bank accounts and credit instruments. Do your research, understand the account terms and avoid costly habits (like overdrafting or using out-of-network ATMs) if at all possible.