Why college students are getting $31 million in restitution

Hundreds of thousands of college students who were deceived about the terms of their debit cards by Higher One Holdings and WEX Bank will receive a total of $31 million in restitution, the Federal Deposit Insurance Corp. said.

The banking regulator slapped the companies with enforcement actions for allegedly omitting details about certain fees, features and limitations of Higher One's One Account, a debit card backed by WEX Bank that colleges use to disburse credit balances. That balance is the money left over when a student's financial aid award exceeds the tuition and fees owed to their schools.

The way colleges refund that money has been a point of contention among policymakers who have accused schools of steering students into onerous accounts in exchange for millions of dollars from financial partners, like Higher One. Years of debates over the issue culminated in the Department of Education this year barring colleges from forcing students to have their credits placed on prepaid or debit cards that charge fees for overdrawing the account.

"It is important that financial products offered to college students under the sponsorship of their universities are clear, transparent and trustworthy," FDIC Chairman Martin J. Gruenberg said in a statement.

According to the FDIC, Higher One improperly collected $31 million in fees from students from May 4, 2012 to July 15, 2014. Regulators say the company failed to disclose on its website a complete list of fees, the availability of fee-free ATMs and details about other disbursement options. An estimated 900,000 students were harmed by the company's omissions.

Eligible students are not required to take any action to receive compensation, which will vary based on the level of harm. Higher One must prepare a plan for dispensing the restitution within the next 60 days. Once the plan is approved by the FDIC, the company will have two months to start mailing out checks.

Besides compensating victims, Higher One must pay a civil penalty of $2.23 million, while WEX Bank must hand over $1.75 million to the government. Both are required to take steps to correct the violations and make sure they are in compliance with all consumer protection laws.

"Product and service changes have already been completed to comply with a significant portion of the issues raised, which mostly relate to practices ended in 2013," Marc Sheinbaum, chief executive of Higher One, said in an email. "Today, the account experience is significantly changed and an even better student experience will be unveiled in 2016."

He noted that Higher One is getting out of the student checking and refund disbursement business, with the $37 million sale of that division to Customers Bancorp. The transaction, announced last week, will give Customers Bank access to the more than 800 colleges and universities that use Higher One to disburse credit balances. Customers, which has partnered with Higher One on checking accounts since 2013, also will gain 2 million student accounts.

On a call with investors last week, Sheinbaum said the new government rules largely prompted the sale. He told investors that the combined impact from "the reduction of accounts and revenue per account" would lead to continued deterioration in profitability. Higher One will continue to operate Cashnet Payment Solutions and Campus Solutions, divisions that provide colleges with software to manage statements, payment plans and billing.

Sheinbaum said, "With the announcement of the sale. . .we're bringing this longstanding matter to a close and look to begin a new chapter for Higher One."

In its 14 years in operation, Higher One's business unit processed more than $70 billion in student refund payments. The company once held a 57 percent share in the so-called campus card market, towering over competitors such as Wells Fargo, PNC Bank and Citibank, according to the Government Accountability Office.

But as consumer groups and policymakers pressed for reforms in the market, Higher One faced scrutiny. The company got in trouble with the FDIC in 2012 for charging students multiple overdraft fees on a single purchase and eating into financial aid to collect fees. The firm had to pay about 60,000 students some $11 million in restitution.

"Higher One is the poster child for the ways that students are repeatedly exploited by the financial arrangements colleges set up," said Ben Miller, senior director for postsecondary education at the Center for American Progress. "We saw it first with credit cards, now here with student aid refund accounts. The result in both cases was the same - bad deals for students who are already feeling pinched by high tuition bills."

Nine million college students across the country are enrolled in schools that have debit or prepaid agreements. Those schools use the cards to disperse about $25 billion in Pell Grants and federal student loans to students every year, according to the Department of Education. Colleges outsource the processing of that money to banks and other financial firms, rather than handle the transactions themselves. Researchers at the GAO found that schools often failed to provide students unbiased information about their options for having the credit balance returned to them.

Schools had a strong financial incentive to have students select their financial partners. In 2012, U.S. Public Interest Research Group Education Fund got a hold of an agreement between Ohio State University and Huntington Bank, which gave the school $25 million in payments over 15 years. The deal also included another $100 million in lending and investment.

Colleges have said the money they receive from the contracts help offset the lack of funding from state legislatures.

Under the new rules, schools must provide students a list of account options to receive excess tuition funds, with each option presented in a neutral way. A student's preexisting bank account must be listed as the first, most prominent and default option. Schools also are required to ensure that students who receive credit balances on a campus card are not hit with fees for overdrawing the account. But the overdraft ban does not extend to other types of campus cards.