Debit card program may run afoul of federal guidelines

  • By Peter Sachs
  • Staff Writer
  • February 09, 2009 @ 3:30 PM

A controversial debit card program that carries high fees for City Colleges of Chicago students may violate federal student loan policies.

More than 6,300 students have signed up to get their student loan refund money on the prepaid debit cards, which are growing in popularity across the nation. But the program for City Colleges students is one of the few that charges fees after the first withdrawal.

That could be inconsistent with the U.S. Department of Education’s rules on such cards, say experts on federal financial aid. 

The Department of Education is gathering more information about the City Colleges' program but isn't ready to say whether it meets the department's requirements.

Other experts say the debit card program violates the Department of Education’s guidance. 

“They’re charging fees even for the issuing bank’s ATMs. That’s unacceptable,” says Edie Irons, the spokeswoman for The Institute for College Access and Success, a Berkeley, Calif.-based advocacy group. “Students have enough, there are enough complications for students to wade through in the financial aid process that adding another set of fine print for them to understand really does them a disservice.”

Mark Kantrowitz, the publisher of the financial aid Web site, agrees.

“This is not a trivial amount of money and clearly the interest of the bank in issuing these cards is it can be a good revenue source,” he says. “But the focus should be on making sure there is reasonable, free access to the funds.”

Details of the loan program and associated fees were first reported by the Daily News in  November.

After a student’s federal loans pay the balance on tuition and other college bills, there’s often an amount left over. The remaining loan amount is known as a refund; students can use it to pay living expenses, including rent, groceries and gas. Colleges traditionally cut students a check with their refunds, but more are turning to direct deposits or prepaid debit cards instead.

The current rules on debit cards, detailed in a 2005 policy letter from the Department of Education, make clear that prepaid debit cards shouldn’t carry fees for normal transactions like withdrawing money.

“The student should not incur any fees for using the card to withdraw the disbursement from the institution over a reasonable period of time,” the official policy letter says. “It would appear to be reasonable for an issuing bank to allow ATM withdrawals from it to be free, or to provide several free withdrawals per month.”

JPMorgan Chase runs the debit card program for the City Colleges. Those students who want their money another way can get it direct-deposited into a bank account or they can receive a paper check. But students say college administrators encourage them to get the debit cards. Those who sign up for the cards get just the first withdrawal for free, even when using a Chase ATM. After that, using a Chase ATM to get cash costs $2 and talking with a teller rings up a $10 fee.

Stephanie Babyak, a spokeswoman for the Department of Education says her office had just started looking into the program at the City Colleges and could not immediately comment on it.

“The CCC debit card program offers students the option of accessing portions of their refund as needed,” district spokeswoman Elsa Tullos says in an e-mail statement. “A transaction fee is incurred for the convenience of using the card in this manner.”

She emphasized that students can get all their money at once using the first free withdrawal.

Allowing just one free withdrawal has its pitfalls as well, Kantrowitz says. Campus ATMs can quickly run out of cash as students make large withdrawals on the same day, and that can force students to use ATMs elsewhere.

And since refunds can top $2,000, carrying that much cash can pose a safety risk.

Irons says district officials should persuade Chase to do away with the fees. Otherwise, she advises students to stay away from them.

“If they have the ability to do direct deposit, that seems like a vastly better option,” she says.

But district officials are defending the program.

 “The program is in full compliance with U.S. Department of Education guidelines,” Tullos’ e-mail statement says. “City Colleges of Chicago does not receive any portion of applicable transaction fees.”

That’s all well and good, Kantrowitz says, but providing for just one free withdrawal isn’t enough.

“The cards charge fees that are higher than what the bank charges their own customers,” he says. “It strikes me that this may not be consistent with the intent of the regulations.”

Staff Writer Peter Sachs covers higher education for the Daily News