Monday, October 4, 2010

Circumventing Credit Reform on Campuses: The Student Loan Debit Card

What a scam, indeed, Manatee Joe!  We are all willing to admit that most of us were idiots when it comes to personal finance when we began college (and moreso when law school began).  When you're 18 and you pull out a loan to go to school, you understand that you have to pay it back, but you don't really understand what that means.  For example, most student don't realize how interest is calculated:

Loan Balance: $50,000.00
Adjusted Loan Balance: $50,000.00
Loan Interest Rate: 6.80%
Loan Fees: 0.00%
Loan Term: 10 years
Minimum Payment: $50.00
Total Years in College: 4 years
Average Debt per Year: $12,500.00

Monthly Loan Payment: $575.40
Number of Payments: 120

Cumulative Payments: $69,048.28
Total Interest Paid: $19,048.28

Did you realize that when you were 18?  Did you know that interest would be be nearly half of the loan???  And that is if you pay the loan back in 10 years...

Another thing that you probably didn't understand when you were 18 is "credit."  Remember being stuck out in the rain and you'd see a tent set up in the Quad with umbrellas--like a reverse Oasis?  You'd approach the tent, and the hunky slightly older male with the Discover t-shirt tells you that you that you could have a super mega sized umbrella with your school's logo on it--if you fill out a form for a credit card.  He even throws in a bag of M&Ms--cause you flirted with him.  Then the credit card comes in the mail, and you may or may not know it's evil--but you charge $500 on it because it's so easy to use credit when you don't have cash on you.  And who has cash in college anyway?  And you are shocked and appalled when the balance is $500 a year later after you pay $100 every month?

Yes, in America, those in pursuit of higher education are often times most lacking in common cents.  Even though they are adults, having been insulated from the real world until college, they make stupid financial decisions that impact their entire adulthood.

Credit Reform has made it harder to market credit cards on college campus--but we all know that the financial institutions will not stop in their immoral and apathetic slaughter of students' lives for the $ake of the almighty dollar.

Here's the new plan, give students debit cards with the Mastercard logo on them, so they can more conveniently (read: easy and quickly) spend their student loan money:

Soon after they arrived on campus, more than a million college students across the country received a welcome letter and a plastic card bearing a MasterCard logo from a little-known company called Higher One:
"Meet your new best friend on campus," the letter reads. A school's emblem is featured in the letterhead - and even on the card - and students are urged to activate their accounts quickly.

But isn't this a credit card? How is this allowed post-Credit reforms?  No, because they are loan debit cards:
These cards, however, are not subject to the sweeping reforms that took effect this year and sought to curtail similar relationships between colleges and credit card issuers. Meanwhile, students complain that the loan cards are riddled with high fees, and they have organized protests at several campuses.
Pre-campus debit cards, the student loan payments would pay your tuition, then the remainder would be distributed to the students to put in a bank account and allocate as needed for living expenses.  Higher One takes the hassle out of this process by sending you a debit card which makes spending the money super easy.  They even encourage you to open up an account with Higher One for comfort and ease.    What's so wrong with that?

Well, the very practices that were banned are being circumvented with this new debit card:
Higher One charges students a $19 monthly penalty for accounts that aren't used for nine months, a practice now banned for credit cards. On its Web site, rival PNC Bank tells schools that setting up tables on campus to market its product to students may be required for a successful program - this is another tactic that was restricted under the credit card law. The legislation also requires colleges to submit their contracts with credit card companies to the Federal Reserve, which must issue a public report. Loan cards are not included.
Penalties for non-use?  This is arguably worse than a credit card that you sign up for and put away and forget about.  It's forcing you to spend your money.  I, for one, used to take the full amount that was left over and pre-pay my rent.  Then I would work for my spending money.  So, I would have been one of the people that was penalized for non-use of the debit/loan cards.  I have a feeling that this card will cause many students to zoom through their funds, since Mastercard is accepted everywhere, and run to the Financial Aid Office for emergency loans.

The business model has translated into booming sales for Connecticut-based Higher One. Its loan cards have yet to be widely adopted in the Washington area, but the company has signed up 675 colleges across the country. Higher One raised $124 million by selling stock publicly this summer, and sales in its most recent quarter reached $27 million, more than double from a year ago.
More than three-quarters of that money came from the fees it charges merchants and students. Higher One chief executive Dean Hatton told investors last month that the success of the business depends on signing up as many students as possible.
Blood money.  The young citizens of our country are dead before they hit the ground because of mounting debt.

When Corporate America dumped toxic chemicals into this nation's rivers for the sake of saving a few dollars, we cried foul.  Corporate America was the direct cause of irreversible environmental damage and still makes cost/benefit decisions that hurt Americans in the long run.  We asked and we still ask that Corporations be responsible for the damage that they cause.  Do we have to wait until the day that we walk over young, able bodied, educated people sleeping on the street before someone asks Corporate America to take responsibility for financial destruction of countless people?


  1. Has anyone received notices in the mail stating their loan is being sold back to DOE? I've gotten a few from Sallie and Discover. I guess they are getting out of the student loan business before the shit really hits the fan.

  2. One of the scam bloggers (I think it was you, actually) mentioned a while back that you should figure out how much interest you'll be paying on top of your loan, and take that into consideration for everyday purchases.

    That $4 Starbuck's coffee may actually cost $6 or $8 if being paid for with loans you took out to cover your cost of living. That $3k bar trip is actually $6k.

  3. The only thing worse than taking out debt for law school is taking out loans for a paralegal program..

  4. Sugar: The DOE took over the federal Stafford loan program, and also began buying up stafford loan debts from prior lenders like Sallie Mae, Citibank, PNC. From here on all federal Stafford loans are processed by DOE. No stafford loans go through lenders like Sallie Mae. College lenders can only provide Private loans now.
    I have a blog about college financing here

  5. "common cents"

    Not sure if it's intentional, but appropriate and well said.

  6. But.. but... but... it's all up to consumer choice! Every possible variation of chicanery will be fixed when 18 year olds see through the scam, refuse to believe their school, and rise up to march their business over to some other provider with less exploitative practices.

    Never mind that there is no other non-exploitative provider, the fine print was written by lawyers for the express purpose of deceiving 18-year-olds, and the institution with the most authority in the kids' lives is also in on the scam.

    What's that line from Paul Krugman? "Great lil' middle class you've got here. It'd be a shame if something happened to it..."

  7. You know, I think a bit more condemnation for the government is in order here. Sure, the banks making these loans are looking for every cent they can get every way they can get it. It pretty much goes without saying.

    But look at the government's role in this.

    The government (almost certainly without even realizing what it was doing) stopped the companies from giving kids access to dischargeable debt because debt is bad. The geniuses in government figured if they made a law, the lenders would just be content to just lose a bunch of business. After all, if the government banned your job, would you just accept unemployment? Of course not! The lenders are the same way.

    Congress, as per usual, did not figure on human nature. They also did not adequately understand the situation they were legislating about.

    The main result of Congress idiotic law is that instead of having kids saddled with dischargeable debt they now have a bunch of extra NON-discharegable instead. Brilliant, Messrs. Obama, Ried and Pelosi.

    Bet you're thrilled to have voted for these morons.

  8. It's time...

  9. What a sick idea. This is what keeps me going. I will keep swinging my fists at these pigs, cockroaches and rats until my knuckles are raw and busted up. Then I will bandage my wrists, forearms and hands and grab a baseball bat and deliver punishing blows to the head, torso and nether regions of the student loan beast.

    When that becomes a bunch of splinters and a handle, I will toss that item and grab a cast iron steel pipe and aim for major arteries, eye sockets, ears, throat, nose, neck, spinal cord, rib cage, spleen, and then aim to puncture the lungs.

  10. I know of Higher One all too well! At my undergrad about half way thru they switched over to using a id/debit card. I hated it because at first you could only get your refunded student loans onto that account. Could only withdraw $500 a day from the atm which there was only two on campus - one in the library which closed after a certain time and you couldn't get in to use the atm, and one in the big dorms which is the one everyone went to. And anytime you used it at say Walmart or Krogers you were charged a dollar fee for using it as a debit card, which is what they kept telling us it was - its a debit card not a credit card (but if you selected credit at check out you didn't get charged the dollar fee) A lot of students complained about the card esp for refund purposes so the following term they allowed you to get your refund via your bank (took a week longer though - the Higher One account was instant) I switched to getting my refund to my bank account.



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