PhotoFor more than a generation now, American college and university tuition costs have increased at a rate far higher than inflation, every year. Up to 40 million Americans currently carry some type of student loan debt, which in many ways is far worse than credit card, medical or underwater-mortgage debt because anyone unduly burdened by those debts at least has the “nuclear option” of declaring bankruptcy, destroying their credit rating but starting over with a net worth of zero, as opposed to a net worth that's a large negative number.

But student loan debt is bankruptcy-proof, presumably because teenagers and young 20-somethings who go over their heads in debt attending the wrong college deserve to suffer much harsher consequences than, say, middle-aged people who go over their heads in debt trying to profitably “flip” a house, putting too many luxe vacations on their credit cards, or gambling all their money away at the legal casino nearest them – those poor choices can be discharged in bankruptcy, but student debts cannot. (Quoth the high school guidance counselors who encouraged their charges to take on those loans: “Student loan debt is good debt. It's an investment in yourself!”)

That said: it's possible that certain colleges and universities looked at their young, debt-riddled students and thought, “We are not making as much money off these people as we could be. How can we make more?” And one answer seems to be: by using prepaid debit cards, rather than checks or direct deposit, to disburse students' credit balances (any loan or aid money left over after paying tuition and other bills).

Deals with schools

Credit card companies used to make deals with schools, allowing them to market their products to college students on campus, in exchange for the school's getting a cut. But this on-campus credit card marketing ended in 2009 when Congress passed the Credit Card Accountability, Responsibility and Disclosure (CARD) Act which, among other things, prevented credit card companies from marketing on campus, required students under 21 to get parental permission before signing for a college-branded credit card, and required schools who made contracts with card companies to submit those contracts to regulators.

This week, the federal Consumer Financial Protection Bureau released a report (available in .pdf form here) noting that, as a result of the CARD act, the number of schools and alumni associations offering credit card deals dropped by 60 percent: 448 college credit card agreements in effect as of 2013, down from 1,045 in 2009.

Just how much money do colleges and alumni associations make from those credit card deals, anyway? In 2013, “payments by issuers” totaled $42,934,507, according to the CFPB report, which also noted that Bank of America is the chief issuer of college credit cards.

But students (and graduates) at least can choose whether or not to apply for a college credit card. They can't choose whether to accept refund fees on a debit card – if their school decides to do it, they're stuck.

Big business

How big a business are these cards?

The CFPB report says that

in February 2013, the Bureau launched an inquiry into other financial products and services marketed to college students. The Bureau found that marketing partnerships between institutions of higher education and financial institutions have shifted from credit cards toward debit and prepaid cards since the CARD Act of 2009 …. as noted previously in this report, the Bureau received 448 college credit card agreements for 2013, down from more than a 1,000 such agreements in 2010. For 2013, the Government Accountability Office (GAO) reported that at least 852 schools had agreements covering the provision of debit or prepaid card services to their students.

That's roughly 11 percent of colleges and universities in the U.S.

How much do these debit cards cost the students in fees, and what do the schools get (or pay) for the deal? Those questions cannot always be answered: agreements between colleges and payment-card companies don't have to be made public. Schools need not disclose to students (or their parents) just how much money the schools stand to make off such deals, if they don't want to. And the card companies are not obligated to offer data showing how much they make in fees, either.

Not just schools

Colleges and universities are hardly the only large institutions who've found it lucrative to work with prepaid debit card companies: certain employers and even state governments do, too.

In June 2013, for example, a McDonald's employee in Pennsylvania sued the franchisee she worked for, alleging that she and her fellow employees received their wages on prepaid JPMorgan Chase cards that were riddled with high fees: $1.50 fee for every ATM withdrawal, a per-transaction online payment fee of 75 cents, a $10 inactivity fee after 90 days, and multiple others.

The plaintiff said that she wanted to receive payment through direct deposit at her credit union, but that option was only offered to management; she and her fellow hourly employees were only offered the prepaid card, and couldn't access their own wages without paying various fees first.

That autumn, federal regulators including the Consumer Financial Protection Bureau reminded employers that it is illegal to require employees to accept their wages on such fee-ridden debit or pre-paid cards.

But there is no such law forbidding state governments from issuing prepaid cards to taxpayers for various reasons. Many states now use prepaid debit cards rather than checks to deliver unemployment benefits.

For example, Bank of America holds the contract to handle unemployment benefits in Maryland, meaning that anytime a Marylander loses a job, Bank of America gets another customer.

The Bank of America webpage discussing the Maryland Unemployment Benefits Debit Card has (as of Dec. 17) a “Program update” in all-red letters, reminding out-of-work Marylanders that: “Because the State of Maryland issues all unemployment insurance payments with the Maryland Unemployment Benefits Prepaid Debit Card, you may not be able to close your account. Maryland requires accounts to remain open in order to allow you to receive payments if you continue to qualify for them. Your Deposit Agreement, which can be viewed below via the Terms & Conditions link, has been updated accordingly.”

Other states made deals with other banks: in Texas, unemployment benefits are paid by Chase Bank debit cards. Georgia's unemployment benefits are dispersed via the “Way2Go” cards issued by Comerica Bank.

Tax refunds

Tax refunds can also come via prepaid cards. In 2013, Virginia started using Way2Go to issue tax refunds, touted as saving the state money off the cost of printing checks but potentially burdening taxpayers with fees to get their own money back. Card recipients were allowed one free transaction, with hefty fees attached to anything after that.

Most government-issued prepaid debit cards are supposed to offer at least one no-fee transaction, letting you get all your money at no additional cost to you. So if you ever get such a card, you should definitely empty all the money off it at once, either in cash or deposited into your own bank or credit union account.

The same holds true for any college student who receives a prepaid debit card for tuition refunds or financial aid: take all the funds at once, and check to ensure you weren't charged any fees for that. And remember that if your school offers you a special deal on a credit card, debit card or other payment scheme, they're not doing this as a favor to you; they're doing this to make money. (Those shiny new administration buildings won't pay for themselves, you know.)

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