Money for College: don’t get caught in debit card debt

January 26, 11:20 AMCollege Admissions ExaminerLauren Starkey

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Preparing for college takes more than going through the application process and making a trip to your local Bed Bath and Beyond for a laundry bag and new comforter. Most students will be managing money for the first time when they arrive on campus, and the vast majority of them don’t have any idea how to do it.

According to the FDIC, 34 percent of college students have credit cards, as opposed to 56 percent who had them a decade ago. That sounds like progress. Fewer students are succumbing to the aggressive marketing tactics of credit card companies, even when their school has a lucrative deal with one of those companies and provides direct access to student’s contact information (read the recent New York Times article on this practice here). Instead, they’re turning to debit cards, which in theory sounds like a great way to give access to funds without incurring debt.

But that’s not what’s happening. CR80News, an online publication about ID technology, predicts that the number of schools that partner with banks to provide debit cards will continue to rise, giving schools a source of revenue as credit dries up for students (according to BusinessWeek, the University of Minnesota received about $40 million dollars from TCF Financial for an ID card partnership through 2030).

 What’s not to like? Many debit cards, including those offered on student IDs, are subject to automated overdrafts. These cards allow withdrawals even when the account’s funds are insufficient to cover them. Then, the student gets hit with a penalty fee, which can run $25 dollars or more.  The FDIC found in a 2008 study that most banks notify customers of overdrafts after a transaction, meaning students have no way of knowing that their $4 chai latte is going to cost them $34 dollars. And it can get worse than that: according to USA Today, a student from Portland State student was charged $150 for two overdrafts.

How profitable are automated overdrafts, and how much damage can they do? Last year, banks earned over $1.77 billion dollars, with an estimated half of that coming from customers between the ages of 18 and 25. Parents and students should start talking now, well before they start packing up the laptop and the Nikes, about managing money. Debit cards aren’t necessarily any “safer” than credit cards; they still feel like you’re not spending money when, in fact, you could be putting yourself in debt.