The purpose of these deals is to foster computerized cashless transactions on-campus, for example purchasing books, meals or tickets to athletic events through a debit card that doubles as a student ID. The students account balance may include monies received through financial aid. Under the agreements between the banks and schools, the schools receive revenue — up to $1 million or so a year — each time a student uses the card in an on-campus transaction.
The USA Today story alluded that the debit cards may be a good deal for the school, but not necessarily the best deal for the students, especially when it comes to overdraft fees. The article cites the a study by the Center for Responsible Lending, a consumer advocacy group that states that young adults ages 18-24 pay, on average, more than $3 in fees for every $1 overdrawn, compared with nearly $2 in fees paid by other adults.
The overdraft practices are reminiscent of the predatory practices of banks in their relationships with low-income customers: to levy the highest penalties on the customers who can least afford them. It is disappointing to see colleges buy into these practices, but easy to understand why: they have an opportunity to outsource transaction processing and student ID records to an outside provider. It is a means for an educational institution to turn a cost center into a revenue center.
The student debit card programs have become the latest higher education cause for New York Attorney General Andrew Cuomo, following a successful investigation into the student loan lending practices of banks that among other things, offered perks to financial aid officers to direct students to use their products. Cuomo's investigation is only in its infancy, but the attorney general's office is concerned about excessively high overdraft fees, and that banks may use their relationships with schools to pitch high-interest credit cards to their students.
Unless Cuomo's investigation finds new evidence of kickbacks to school officials, solutions to the problems of student debit cards can be worked out between the schools and banks without government intervention.
One solution is to not allow students to overdraw their account. The systems at the point of sale could tell a cashier or the bursar that the student has insufficient funds; a balance check would be unnecessary. This will work if a second solution is in place: student deposits clear in one day, instead of the usual three at most money center banks. Commerce Bank is one financial institution that markets such a service to competitive advantage.
Spokespersons for the banks and their associations have argued that the overdraft penalties force college students to manage their money responsibly. I would argue that preventing overdrafts will do the same, without putting students further behind the financial eight-ball or encouraging them to live beyond their means. They would also learn to have cash on hand for their coffees and mocha lattes.
My proposed solutions could be considered corporate social responsibility on the part of the banks and schools. No doubt it's in their best interest for students to graduate with better credit and more income to repay student loans.
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Article Added on Tuesday, May 27, 2008
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