Nearly half of the state’s community colleges and a handful of other higher education institutions now disburse student financial aid on debit cards through contracts with Higher One, a financial firm that has garnered increasing scrutiny for charging multiple fees, aggressive marketing tactics and privacy concerns.
At least 52 California Community Colleges use the company, from Imperial Valley College to Shasta College. CSU Fresno also contracts with the company.
Earlier this year, Ventura College student Sherry McFall filed a class-action lawsuit against Higher One, claiming the company created banking accounts for students without their consent, lured them into using Higher One accounts and improperly disclosed fees. An attorney for Higher One said the case has no merit.
Help us do more.
A May report by the U.S. PIRG Education Fund identified Higher One as the biggest player of its kind in the higher education market, with 520 partner campuses that enroll more than 4.3 million students. The report noted that many banking or debit card arrangements between financial firms and colleges feature weak consumer protections and limit students’ options.
The Department of Education announced in May it is planning to establish a negotiated rulemaking committee that will look in part at whether college students should have more choice about whether to accept debit cards or banking services through contracted providers, “particularly in view of the costs and fees associated with the use of those cards and services.”
And lawmakers have expressed concerns about Higher One, which has a corporate office in Oakland, and similar financial services companies, calling on them to put an end to fees that cut into students’ federal student financial aid.
Here’s how Higher One works, at least at one campus, West Valley College in Saratoga.
The college signs an agreement with Higher One in order to save money on administrative costs and add convenience for students. Instead of disbursing paper financial aid checks themselves, college officials provide all students’ names, addresses and student ID numbers to Higher One.
Higher One then sends debit cards to all students, regardless if they receive financial aid, in the mail. The cards, which carry the school’s logo, contain the student’s financial aid money – whether it’s a state Cal Grant, federal Pell Grant or a loan.
Higher One encourages students to activate the debit card and withdraw funds as they're needed, saying this is the fastest way to get money out. Students can also opt to transfer the money to another bank account or receive a paper check. After paying their college fees, community college students often have excess grant or loan money for other expenses.
But when students activate the card and open a Higher One account, several fees apply. If, for example, students use their cards at a retailer such as the grocery store or bookstore, and they use the “debit” option – entering their PIN rather than choosing “credit” and signing a receipt – they pay a 50 cent transaction fee.
If students use a non-Higher One ATM, they pay $2.50 to Higher One plus whatever fee the ATM owner charges, often an additional $2 or $3. If students leave their accounts inactive for six months or more, they pay a fee of up to $10 per month.
McFall’s lawsuit claims Higher One lures students into activating the card and banking with the company by bombarding students with email and advertisements that say this is the fastest way to access the cash.
The complaint says the company does not adequately disclose the fees – making students hunt for the information. It says that although the card is labeled and marketed as a debit card, students are penalized when they use it as a debit card at a retailer.
The lawsuit contends Higher One and its banking partner, Bancorp, violated California’s Unfair Competition Law, the Consumer Legal Remedies Act and the Electronic Funds Transfer Act.
Julio Vergara, an attorney with Scheper Kim & Harris in Los Angeles, who is representing Higher One Holdings Inc., said the company plans to vigorously defend itself against the allegations and that McFall’s claims are factually and legally deficient.
Although Ventura County Community College District was not named in McFall's suit, Vice Chancellor of Business Services Sue Johnson said the Higher One fees are explicitly disclosed on the school's website and are avoidable.
"There's nothing in the mandated process that incurs the fee at all," Johnson said. "You don't have to use the card. That's avoidable. Once you get the card, you can put the card in a drawer and never touch it again."
Many students who receive cards do end up opening Higher One accounts and racking up fees. The company notes in its annual report that its sales effort involves persuading students to activate a Higher One account. The company had 2 million such account holders as of December 2011.
And Higher One President Miles Lasater stated in an interview with the New Haven (Conn.) Independent that half of its revenues – about $88 million in 2011 – come from fees it charges to account holders.
At West Valley College, only 11 percent of students who received cards in the past 90 days activated them, but of the students who activated their cards, 82 percent – or 559 students – opened Higher One accounts, according to Herlisa Hamp, director of enrollment.
Ken Colson, a retired instructor at West Valley College, complained in May to the U.S. Department of Education that such a practice could violate the Family Educational Rights and Privacy Act Regulations because under the law, students have the right to prevent the college from releasing their address and other information to certain parties.
Hamp said the college treats Higher One as a part of its financial unit and therefore considers the release of all students’ information allowable.
She pointed to a section of the law that allows a college to disclose information without prior consent to a contractor if the college has outsourced institutional services to a company for a function that the college would otherwise use employees to do.
But Colson said that exception should be challenged.
"Just because it is in the code, doesn't mean it meets consumer protection standards," Colson said in an email. "What I have concluded from looking into this issue is that college students are consumers and need more protection of their privacy rights."
Hamp said she has heard concerns about Higher One, mostly from students who receive the debit cards as a solicitation to open an account even though they do not receive any financial aid. As a result, college officials are trying to make a change so that these students don’t get the card.
She said the company discloses its fees and students can avoid them, but they have to read carefully.
"I think it's there and it's all broken down, but remember for some of our students, it's their first bank experience, so they don't necessarily pay attention," she said.
The U.S. PIRG report found almost 900 card partnerships between colleges and banks or other financial firms, and said that fees can be “steep and frequent.”
Responding to the report, Sen. Dick Durbin, D-Ill., Sen. Jack Reed, D-R.I., and Rep. Peter Welch, D-Vt., sent letters to 15 financial institutions and companies, including Higher One, asking questions about their campus card fees and contracts.
The letter called attention to the debit card purchase fees, inactivity fees and overdraft fees, calling them “egregious.”
Also in June, Durbin and Rep. George Miller, D-Martinez, sent a letter, [PDF] to the U.S. Department of Education and the Consumer Financial Protection Bureau asking them to examine bank-affiliated student debit card practices.
Here's a list of California colleges and universities that contract with Higher One, according to a list distributed by the company and obtained by California Watch and a search of college websites and announcements:
- Allan Hancock College
- American InterContinental University
- American River College
- Antelope Valley College
- Berkeley City College
- Butte College
- Cabrillo College
- Cerritos College
- Chabot College
- Chaffey College
- College of Alameda
- College of the Canyons
- College of the Redwoods
- College of the Sequoias
- Columbia College
- Cosumnes River College
- CSU Fresno
- Cypress College
- De Anza College
- East Los Angeles College
- Evergreen Valley College
- Folsom Lake College
- Foothill College
- Fullerton College
- Hartnell College
- Imperial Valley College
- International Academy of Design and Technology
- Irvine Valley College
- Los Angeles Trade Technical College
- Laney College
- Las Positas College
- Long Beach City College
- Los Angeles City College
- Los Angeles Harbor College
- Los Angeles Mission College
- Los Angeles Southwest College
- Los Angeles Valley College
- Merritt College
- Mission College
- Modesto Junior College
- Moorpark College
- Mount San Antonio College
- Ohlone College
- Oxnard College
- Pierce College
- Sacramento City College
- Saddleback College
- San Joaquin Delta College
- San Jose City College
- Shasta College
- Solano Community College
- Stanford University
- Ventura College
- Victor Valley College
- West Los Angeles College
- West Valley College