Like many college freshmen, Tyler Riley arrived on the West Virginia University campus and immediately faced a series of decisions: which classes to take, which clubs to join, whom to befriend. Compared with these, the choice to open a checking account at his school’s on-campus bank felt like a no-brainer.
“I first decided to bank with them because they didn’t have a monthly maintenance fee for students, they had mobile deposit and were located close by,” Riley says.
But Riley soon learned one of his first lessons at college: These accounts do have certain advantages, such as no monthly maintenance charges, but they still carry steep overdraft fees, and Riley ran afoul of them repeatedly. These are the penalties a person pays when a transaction exceeds the available balance in the account, and banks may charge a customer several such fees in a single day as successive transactions come in.
Riley’s story reflects a larger issue. Americans aged 18 to 25 incur more overdrafts each year — a little more than two — than any other age group, according to an analysis of data provided by the Consumer Financial Protection Bureau. Yet these accounts, often marketed by schools and banks as being tailored to meet students’ needs, don’t address this fact.
“While relatively few consumers face the great majority of overdraft charges, a disproportionate number are students,” says Devan Goldstein, a banking analyst at NerdWallet. “But there are cheaper ways to learn how to avoid overdrawing your account than having that brutal first experience with those fees.”
Why universities and banks partner
University-affiliated checking accounts aren’t objectively worse than the national standard. But they’re not much better, either. So why do some schools team up with financial institutions in the first place? Sometimes the university genuinely needs a service the bank can provide. Or sometimes it sees a new revenue stream.
West Virginia University teamed up with their partner bank seven years ago to more effectively disburse financial aid refunds to students, says Dan Durbin, senior associate vice president of finance at WVU. Their partner bank pays the school $400,000 annually for the right to use the school’s logo on a co-branded debit card and on rent for two on-campus branches, he adds.
In 2015, the University of California, Berkeley, found some reprieve from its financial challenges when it signed its official banking partner, a deal that will net the school $17 million over 10 years. The University of Minnesota is paid around $1 million each year by its partner.
“These resources are designed to help the students transition into financially responsible adults while at college, as well as give them the tools to succeed after graduation,” says Solly Fulp, executive director of UC Berkeley’s University Partnership Program.
Meanwhile, becoming a university’s official partner can give a bank competitive advantages, including the right to have the only bank branch on campus, place ATMs and signage in high-traffic areas, or hold giveaways and other promotions. All of this allows a bank access to an important group: people making their own financial decisions for the first time.
“We have a chance to build long-lasting customer relationships with young people who are likely to continue to live and work inside our retail network after graduation, ” says Nick Certo, the partner bank’s senior vice president for university banking.
It’s a reminder that a school’s business deal with a bank or credit union is just that — business. But cheaper options do exist, both off campus and online.
Scrutinize accounts and consider alternatives
Universities often give students a couple weeks to attend classes before requiring them to set their schedules. But unlike Intro to Shakespeare or Principles of Economics, you can’t take checking accounts for a test drive. That’s why you should take plenty of time to understand a checking account’s fees and services before signing up.
You should also explore the other options in town. We found local checking alternatives — meaning banks or credit unions within three miles of campus — with a lower overdraft fee at 16 of the 20 universities we surveyed. Six had an overdraft fee that was at least $10 lower than the one charged by the university-affiliated account.
And because of online and mobile banking, you might not need your bank or credit union to be within walking distance. In fact, certain online-only banks offer some of the best checking accounts for students. These accounts typically don’t have overdraft or monthly maintenance fees and offer broad ATM networks and dependable customer service.
University-affiliated banking is ripe for change
The Credit Card Accountability Responsibility and Disclosure Act, or Card Act, was passed in 2009. Among other reforms, it required issuers to have a customer’s opt-in before processing transactions that exceeded the customer’s credit limit and charging an “overlimit” fee. “Had these fees continued at their pre-Card Act level,” the CFPB says, “consumers would have paid $9 billion more from the beginning of 2011 through to the end of 2014.”
A similar opportunity exists in banking with respect to overdraft fees. It might be difficult for the government to eliminate these fees for college students, but it could cap the number that university-affiliated banks and credit unions can charge per billing statement.
Schools, meanwhile, can use the CFPB’s Safe Student Account Toolkit to help them decide whether to co-sponsor a checking or prepaid account. A “safe account,” the bureau says, is one that doesn’t charge overdraft fees, provides customers with a network of fee-free ATMs and insures deposits.
For now, take a close look at your on-campus bank or credit union, and ask whether it’s truly the best place to keep your money. This is a skill — critical thinking — that you’ll spend your time at college developing, and it starts during orientation, when you see a promotion for your university’s official banking partner.