Colleges Add to the Overdraft Loan Problems

Posted by Mike Smith :: December 3, 2007 @ 6:02 am

As I wrote in my post on bank overdraft loans, consumers are being charged $17.5 billion per year by this abusive practice. In their latest release, Billion Dollar Deal, The Center for Responsible Lending reports that the 18-24 year- old demographic is being particularly hard hit by these fees. Some colleges are hoping to cash in on this market, and are subsequently adding to the problem.

Many universities, more than 100 by the report's account, are granting exclusive campus marketing rights to a single bank. If that bank charges overdraft fees, the impact on students can be quite large. While it's not uncommon to limit the number of service providers permitted on campus, there are many instances when students have no choice but to sign up for a debit card. One way this is done is by merging a partner bank-issued debit card and the student ID.

Some of the reported facts about the 18-24 year-old consumers:

• Banks use abusive overdraft loans to collect nearly $1 billion per year in fees from young adults who earn relatively little as students or new members of the workforce

• Debit card point-of-sale (POS) transactions are the leading cause of overdraft loans for young adults

• Young adults pay more than $3 for every $1 borrowed for debit card overdrafts

One of the reasons why young adults are getting hit so hard by these fees is that they are more likely to use debit cards, even for small purchases. 70% of those surveyed would use their debit cards for purchases of less than $2 versus only 41% of all adults. Another reason is that they generally don't have as much money as older adults. That means that their bank accounts are more likely to be hovering around the zero balance line to begin with. A final reason is that they may not be as experienced with their finances and are thus more susceptible to over drafting without even realizing the impact.

Loans should be straightforward and affordable, like the person-to-person loans available at Lending Club. Abusive overdraft loans have no place in the financial market and should be replaced by more reasonable practices such as linking a checking account to a savings account. You are again urged to review your own accounts, and your college student’s accounts, to see if such practices are in place.