Reduce college costs by hundreds! (How schools and lenders teach us about overdraft fees)

So junior’s off to college?  Well, here’s list of some things he absolutely cannot do without:

    • Laundry detergent?…..check
    • Boots, raingear and winter coat?…..check
    • Class schedule?…..check
    • Overdraft protection?…..check

Wait…..what? Overdraft protection?

Yep. You read correctly.  Odds are more likely than not that once junior gets to school and opens up his school-sponsored checking account (complete with handy-dandy debit card) he’ll get a quick lesson in banking and overdraft fees.  Of course, if anybody is sending him money on a regular basis, they will learn this lesson as well.  Why? Because (as reported by the Center for Responsible Lending in their latest report: “Overdraft U: Student Bank Accounts Often Loaded with High Overdraft Fees”)   the overwhelming majority of accounts that are made available to incoming students are pre-destined to generate huge fees for the bank. (think: Millions) 

Exclusive and (ahem) lucrative agreements

For a long time, banks have realized that college students are a great way to grow their customer base.  Along with the many freedoms that college brings is the freedom to watch your own finances.  You’re free to spend what you want on books, nights on the town, late-night snacks, beer (we’re not naïve…we’ve been to college).  How banks get these new accountholders is nothing shy of brilliant. They either facilitate the schools’ financial aid packages (“let us disburse the funds and we’ll give each student a free account”) or pay the school directly to be endorsed as the “Official Bank of State U.” 

Either way, the agreements let the banks logo the living daylights out of the campus (many even let them put their logo on the students’ official college IDs!)  The banks realize two things: 1) students are going to make up for the marketing and setup costs by incurring fees on a frequent basis; and 2) once consumers get a checking account, they are extremely likely to stick with that bank for years afterward (even if they’re unhappy with the services that they are getting).

“But, isn’t this a conflict of interest?  How can the schools be on the lookout for predatory practices if the banks are paying them cash?”  Great questions.  An even better question “Is the school putting my child in a bad situation?…..”

“What do you mean a multiple fee-fee?”

Although I’d love to claim that line, it’s from The Drew Carey show. In the show, Drew’s bank calls to tell him that he’s overdrafted on his checking account.  He asks them to transfer money from his savings account to his checking account.  He acknowledges that there’s a fee for the phone call and for agreeing to make the transfer.  Then Drew says “a multiple fee-fee!” [big laugh from the audience]. But, how crazy is it? 

The current college generation doesn’t use checks (or even cash) the way college students of years-past did.  For them, it’s all about the debit card.  Maybe it’s because using plastic makes it less painful than using cash  or maybe it’s because millennials use the plastic alternative to focus more on the benefits of buying something than what it actually costs.  In any case, the result is that this generation overdraws their accounts more than anyone before.

Customers love debit cards…

because they’re easier to carry than cash, they work almost everywhere, they’re useless to thieves and they can be replaced.   The downside is that debit-cards are the easiest way known to man to lose track of how much money you actually have.  (How long would it take you to get into trouble if you started writing checks but NOT writing down where they went and for how much?)  And, if there’s a group of people who are likely to lose track of their disposable funds, it’s college students who start their evenings at around 11:30 p.m.  The next day when they say stuff like “I think that we got pizza last night at some point,” they probably don’t spend a whole lot of time thinking about whether they went to the ATM or how many times they did so.

Banks love debit cards…

because they provide a quick (and legal) way to snatch much of those “disposable funds” from their customers in the form of a fee.

    • Wanna check your balance to make sure you have enough to pay for dinner? Ka-ching!
    • Wanna take money from an ATM that has some other bank’s name on it? Ka-ching! 
    • Make a mistake and swipe your debit card for something that is a dollar-and-a-half more than what you have in your account? Double Ka-ching!

The biggest fee bell-ringer is the overdraft fee.  The usual cost for an overdraft is $35.00. “So, just don’t overdraft. How hard can this be?” you say.  If you’re at an ATM, trying to get cash an overdraw is impossible.  Their computer will tell you (with incredible speed) “we’re sorry, but we are unable to process this transaction.”  But, if you’re buying something, it doesn’t quite work that way.  In a perfect world, the bank doesn’t let you overdraft.  Couldn’t they just have their system tell the vendor to turn you down because you’re out of cash?  They COULD. But, here’s the rub….they don’t want to.

“Hold your chin up….higher”

There’s a Clint Eastwood film where he overpowers a guy who is twice his size and makes him look silly…(OK, maybe that’s every Clint Eastwood movie – other than the one that he did about taking pictures in Montana and feelings).  He has the guy on his knees in some kind of hold and tells him “hold your chin up….higher.”  And when the guy does, Clint knocks him out. 

Not a pretty picture, but this is exactly what the bank is doing to your kid, when they give him a debit card.  (perhaps we can discuss the outrageousness of even having automatic fees in an age when everything the bank does is performed by computers and only takes them three seconds in another blog post)  This post, however, is about THIS type of outrageous fee.

If junior overcharges his debit card by $50.00, the bank will process the transaction and pay the vendor. Then they will charge him an additional $35.00 for using money that he doesn’t have.  Here are some other charges that will incur a $35.00 fee, if junior has insufficient funds in his account. Let’s say he wakes up with an $8.99 balance on his school-issued debit card:

    • He buys a $10.00 T-shirt on game-day, because he wants to look like everyone else on the way to the game……Boom! $35.00;
    • He buys a $7.50 hot dog while at the game, because he forgot to eat-breakfast…..Boom! $35.00;
    • He buys a $3.00 pin on his way out of the game that says “The other team [stinks]” because we just won….Boom! $35.00;
    • He buys a $1.75 hamburger on the way to his apartment because there was free beer at the tailgate party he went to on his way out of the stadium…Boom! $35.00;

Scenario 1: Junior’s card is “denied,” so he has to go to the game in one of the T-shirts you bought him on his last day at home; has to subsist on some of his friend’s nachos and wait til he gets back to his dorm to have dinner.  No money spent.

Senario 2: Junior enjoys a hot-dog and a burger, whilst wearing his new pin-draped T-shirt and lies down to nap after the game with a full tummy and looking smart in the school’s colors (even though there is a mustard stain that he’ll forget to treat, rendering the shirt useless for future wears)  The whole afternoon set him back a whopping $162.25, because the bank that the school set him up with charges a separate overdraft fee, no matter how small the purchase. Unfortunately, he has no idea that he’s overdrawn and will continue buying stuff with money he doesn’t have – until he tries to get cash at the ATM or gets his next bank statement (whichever comes first).

There oughtta be a law

Well there is….sorta.  The Federal Reserve passed a rule in 2009 which required banks to get consent from consumers before they charge them an overdraft fee.  But (as we all know from the mortgage crisis) requiring the consumer to sign a form that warns them of impending nastiness rarely gets them to think twice.  The bank can also get their “consent” while junior is signing the stack of forms written in itty-bitty print when he is opening up the account, which usually guarantees that he will not see the warning, anyway.  

Editor’s note of irony: Still think that if you have the chance to sign a disclosure, you’ll be aware of which consumer rights you are giving up? Everyone reading this has a cell phone.  Can you remember what your cell phone contract said about Forced Mandatory Arbitration or about the fact that you gave up your right to your day in court if you have a fight with your cell service? …..We didn’t think so.

The Consumer Financial Protection Bureau (CFPB) recently proposed a “Safe Student Scorecard,”   which (among other suggestions) asks that schools that have these type of partnership agreements with lenders require the lenders to set up accounts that don’t have overdraft fees.  To be sure: the proposal does NOT suggest that banks let you overdraft without charging you fees.  The suggestion is that the bank figures out a way to turn down the transaction and not let you spend money that you don’t have in the first place.  (one could argue that this is an admirable understanding to have with regards to one’s personal finances).

Editor’s note of even more irony: the next time someone tells you that “all governmental regulations are bad” or how the CFPB was the creation of Satan, ask if they don’t think that preventing overdraft-fee-gotchas against 18 year-olds is something that might not be a tad helpful for all of us?

What now?

If you’re sending junior to college, you might want to set him up with his own account before he gets to campus.  After all, you don’t HAVE to use the bank that the school has an agreement withThe CRL report points out that on-average, the accounts that are set up through these partnership agreements will wind up costing the student more in fees than the non-partner banks that the student finds on his own.  In the most unbelievable examples, students can get charged more in fees by the partnership banks than they will spend on books for the entire school year.  College is a giant learning experience.  Where better to learn about how bank fees can screw up your account balance? 

Posted by: Mark Wiseman (who once had a roommate who was once charged a fee by his bank, because he printed his signature on his check.  We all thought it was hilarious….well, almost all of us)

You mean I have to pay this money BACK?……what you should know about Student Loans

 Autumn is almost here – there’s a little crispness in the air some mornings, pumpkin spice lattes will soon be available, and students everywhere are going back to school. Back-to-school needs raise particular consumer concerns. A few weeks ago, the Ohio Attorney General’s Office issued a press release about “grant” scams where consumers were geting calls promising grants for school tuition, if they would only put some money upfront for wire transfers and fees. Hopefully it’s an easy decision for students everywhere to hang up on such obvious scam artists.  

Still, not every back-to-school choice is so easily cut and dried. If you have to take out loans to cover tuition or living expenses, you’ll be choosing among a dizzying variety of federal and private loans. Although financial aid offices often advertise how easy and simple it is to get the loans in place, speed and ease might not be the best strategy when taking on tens of thousands of dollars in debt. Instead – to be an informed consumer – you should know the terms that differentiate student loans. Knowing about the obligations you are signing up for will help you obtain the money needed for an education, while ensuring that you have the best chance to get out from under the debt after you graduate.  

Who is issuing the loan? and Who is borrowing the money?  

Loans can be obtained from one of two places – either the federal government or a private institution (like a bank or credit union).  This first consideration can create a huge difference in the student’s obligation to repay the loan. 

In a ‘Federal’ loan, every borrower who is getting that particular type of loan is getting the same deal. There’s no variation based on your individual history.

A private loan works differently. A private student loan is issued by a bank and the bank can set their own rates depending on your credit score, income, or any other factor they want to consider. Unlike the Federal Government, private lenders assess everybody differently.

A student loan can be issued directly to the student, taken out by a student with a cosigner, or taken out by a parent. As with any loan, whoever signs the loan has the responsibility for paying it back. Although many people do not realize this, a cosigner is not required merely to provide a character reference for the student. If the student fails to pay, the cosigner will be responsible to pay the entire remaining balance. Even if the parents have an agreement with their child about who will pay the loan back – in the eyes of the law the co-signor parent will be on the hook for the money if the student cannot make the payments. In every case when the loan is taken out by the parents – whether a federal Parent PLUS loan or a private loan – the parents will be solely responsible.

Here are some key questions to help you differentiate between the various loan-types.

    • What is the interest rate? The headline you are most often told about a loan is the interest rate.  You may have heard that this past summer Congress updated the interest rates on the federal loans. Though these rates are set in stone for this year, it is likely that the interest rates may change for upcoming years. Moreover, if you’ve already taken out federal loans, your loans are fixed at the rates that applied when you signed for the loan.  And what about the interest rate for private loans? The interest rate you get on a private loan will differ based on how reliable the bank thinks you are. Some students have to borrow at higher interest rates; while those with co-signers will be able to obtain an initial rate that matches or beats the rates on federal loans. However, even if you are offered a better initial interest rate, your questions should not stop there.  
    • Is the interest rate Variable or Fixed? Interest rates can be either variable or fixed. As the names imply, fixed rates stay the same over the life of the loan, while variable rates change. Federal loans are fixed, while most private loans are variable.  Even knowing that a rate is ‘variable’ does not end the concern.  Many variable rate loans are tied to the LIBOR rate (which is a rate that governs what banks charge each other to borrow money overnight)  Because it fluctuates more than the United States Prime Lending rate, you could be misled into thinking that your variable rate is not so worrisome after all.
    • How is the interest calculated and when does it start to accrue? When an interest rate ‘accrues’ is a fancy way of saying, when and how is the interest added to your loan balance.  The interest can begin to accrue from the day you take out the loan, or it can wait until a set number of months after you graduate (or stop being a full-time student). The federal loans labeled as subsidized do not accrue interest while you are in school, while unsubsidized loans accrue interest once you take them out. Graduate and Parent PLUS loans all accrue while you are still in school, though Perkins loans do not.  Most interest on a private loan will accrue while you are still in school, though some lenders may offer deferments (or ‘delays’) on adding the interest to your balance. It’s also important to note that the interest on private loans may compound while you are still in school – that is, the interest you accrue in one month will get added on to the principal and increase the interest that accrues the next month, which is again added and so on. (meaning to say, the monthly interest amount will slowly increase every month, because the principal balance will always be growing) For the federal loans that accrue interest while you are in school – the interest amount will be added to a separate fund and not get added to the principal (that is, “capitalize”) until after you graduate. (this means that until the time for repayment arrives, the monthly interest amount will be calculated using the original balance only)
    • Are there any other fees for taking out the loan? Some loans have a one-time flat fee to cover transaction costs when generating the loan, called ‘origination fees.’ On federal loans, these are usually between 1% – 4% of the amount that you borrowed.  Private lenders will vary from having no origination fee to having rates higher than the federal ones.  
    • Will this loan be eligible for unemployment deferment or other deferment plans? Other variables might affect the cost of the loan that aren’t so easy to quantify. For example, on federal loans you may have the opportunity to defer payments for months at a time if you become unemployed. (such as – if you can’t get a job right away, when you graduate) There’s no guarantee that a private lender will provide a similar service. There are many types of deferment (also known as ‘forbearance’) for circumstances ranging from military service to disability. Unemployment or economic hardship deferment is the most common.  You can read about these and research the other deferment plans on government websites like this one.  
    • Will this loan be eligible for income based repayment? The federal government also has Income-Based Repayment (or IBR) plans. These are incredibly helpful if you have many more loans than you can afford (say, perhaps your salary isn’t as high as you thought it might be).  IBR plans cap your monthly payment at a low percentage of your overall income, so you aren’t swamped with monthly payments that swallow most of your salary. Most federal loans qualify for IBR except for those taken out by parents under the Parent PLUS program. Private loans don’t qualify for the federal IBR program either. You can read more about the specifics of the IBR program here. 
    • Will this loan be eligible for Public Service Loan Forgiveness or other forgiveness plans? The federal government also has a program to couple loan forgiveness with the IBR plan. If you work for the government or for a nonprofit and make 10 years’ worth of continuous IBR payments, the remaining balance on your loans will be forgiven after the 10 years. As with deferment plans, there are more nuances to this Public Service Loan Forgiveness program, and there are also many other smaller loan forgiveness or loan discharge programs that you can research here

Editor’s shameless plug: this program will be particularly helpful if you graduate with a lot of student loans and want to work for a non-profit that specializes in….Consumer Law, let’s say.  

Of course – this is not an exhaustive list of the concerns you should have when considering which type of student loan to use.  The following chart summarizes the various options for Federal Student loans taken out for fall, 2013 that we discussed above.  (This summary contains the ‘most-likely to occur’ scenario with each loan type).  The rules and rates will be different for older loans.

    • The chart does not discuss loans obtained from private lenders.  That is because, private-label loans are almost universally alike in their characteristics:  the information pertaining to interest rates will depend on the individual lender; and they do NOT offer Unemployment (or other) deferment, Income-based repayment or Public Service Forgiveness plans. 
Terms of the Loan Federal Perkins Federal Direct Subsidized Loans Federal Direct Unsibsidized Loans Federal Graduate PLUS Loans Federal Parent PLUS loans (Parent is Borrower)
What is the Interest Rate? 5% for all students 3.86% for all students

3.86% for undergrads

5.41% for Grad students

6.41% for all graduate students 6.41% for all parents
How/When does the interest accrue?  Does NOT accrue, until 9 months after graduation Does NOT accrue, until 6 months after graduation

Accrues during school

Capitalizes 6 months after graduation

Accrues during school

Capitalizes 6 months after graduation

Accrues during school

Capitalizes 6 months after graduation

Origination fees? No Yes – 1.051% of loan amount Yes – 1.051% of loan amount Yes – 4.204% of loan amount Yes – 4.204% of loan amount
Eligible for unemployment (or other) deferment?* Deferment options exist, but NOT for unemployment Unemployment and other deferment options exist Unemployment and other deferment options exist Unemployment and other deferment options exist Yes, but it is the parent who must meet the  qualifications
Eligible for income-based repayment? Generally not, unless consolidated  with other eligible Direct Loans Yes Yes Yes No
Eligible for Public Service Loan Forgiveness (PSLF) plans?** Yes, if you are employed as a teacher, nurse or police officer Yes, for the PSLF program and certain other plans Yes, for the PSLF program and certain other plans Yes, for the PSLF program and certain other plans No 

*The deferment programs are quite extensive and have many categories of possible deferment circumstances. If you anticipate needing to use deferment for a particular circumstance – military service, the possibility of medical disability or other economic hardship – make sure to research deferment more substantially
**Again, there are numerous programs combined here under the heading of loan forgiveness, so research any ones that you want to be sure will apply to the loans you take out.

Here are a few other student loan tips:

    • Borrowed too much? If you accidentally overestimate how much you need for living expenses or that semester’s tuition, you can return federal loans within 120 days of the loan’s disbursement at no charge. You don’t even have to pay the origination fees or accrued interest. 
    • Where’s my loan? Always find out from your financial aid office what website to use to access your loans. Keep in mind that each loan may end up with a different servicer on a different website. Knowing how to check the loan balances means you can ensure there’s no suspicious activity on your account.
    • How much will my monthly payment be? You can use online calculators to do the math to compare different types of loans, though I haven’t found one that does a good job of accounting for how interest accrues. You can try this one or this one.   (If you find any better calculators, forward them to Consumer Courage and we’ll update this post!)
    • What if I get lucky and make tons? Once you start paying back your student loans, you might choose to pay down more per month than your regular monthly payment.  Remember to call your servicer and make sure that these extra payments will actually be applied to your principal balance. Some servicers might choose to store these as “advance payments,” and keep them on hand in case you don’t pay fully in later months, rather than applying them to your principal balance.

Hopefully this gives you a good idea of the differences between different types of federal loans and will help you figure out how to start assessing the terms given to you by a private lender. Taking out students loans can be a huge choice, because the terms of the loan will impact your ability to save money and pay your bills for decades down the line. Knowing the right questions to ask will help you make the best financial decision possible.

Posted by: Rebecca Maurer (who is welcome to submit another post to Consumer Courage anytime she wants!)