Young and overdrawn

Study: Bank fees hit students hard

College students and other young adults are being hit especially hard by bank fees for overdrawn accounts because of their heavy reliance on debit cards, according to a new study.

Consumers 18 to 24 pay an estimated $3.25 in fees for every $1 their account is overdrawn, compared with about $2 for all adults, concludes a study issued Monday by the Center for Responsible Lending, a nonprofit group based in Durham. Debit-card use is the leading cause of overdraft loans for young adults, the report said.

"These college students are smart, but they are being taught an incredibly harsh financial lesson," said Rep. Carolyn Maloney, D-N.Y. "Many students find themselves paying hundreds of dollars in fees before they even realize they have overdrawn their account."

Maloney has co-sponsored a bill that aims to curb bank and credit unions' overdraft practices. She and Eric Halperin, director of the Center for Responsible Lending's Washington office, discussed the center's report during a Monday conference call.

It used to be the norm that banks and credit unions declined to honor checks or debit-card payments if a customer's checking account lacked sufficient funds. Now they routinely cover the shortfall, then charge a fee for doing so. The financial institutions require that the customer pay the amount of the shortfall.

The banking industry contends that the overdraft policies are appreciated by customers, who want to avoid embarrassment when a transaction is denied, along with the fees merchants charge when a check bounces.

The American Bankers Association says consumers have options for avoiding overdraft fees, including arranging with their bank to have overdrafts paid through a line of credit or a savings account. The Center for Responsible Lending recommends that consumers exercise such options and wants it to be mandatory for banks to have the written consent of consumers before covering overdrafts for a fee.

Last month, the bankers association released a survey that it commissioned that found 20 percent of consumers had paid an overdraft fee in the past 12 months. Of those who paid such a fee, 88 percent said they were glad the payment was covered and 11 percent said they wished the bank had refused the payment.

Young adults pay nearly $1 billion in fees each year on overdrawn accounts, the center estimates. The median overdraft fee that banks charge young adults is $33, it said.

Lauren Schlukbier, a junior at N.C. State University, said she changed the way she pays for purchases after incurring an overdraft fee three months ago -- the second time she had overdrawn her account when using her debit card.

"I tend to use cash more now," she said, because it's easier to keep track of, rather than keeping on top of her checking account.

The center's study contends that at least 100 colleges nationwide contribute to the problem by forming partnerships with banks. As part of these deals, banks and universities offer co-branded ID cards that can double as debit cards linked to a checking account at the partnering bank.

The problem with such deals, Halperin said, is that universities -- which can receive significant revenue from these partnerships -- don't insist on policies that protect students when they overdraw their accounts.

Such protection, he said, could include requiring that banks only be allowed to impose overdraft fees if the student specifically opts for such a service, rather than having overdraft fees automatically imposed.

Wachovia of Charlotte has agreements with a half-dozen colleges across the state, including N.C. State and UNC-Chapel Hill, according to the Center for Responsible Lending.

Wachovia spokeswoman Christine Shaw said students can set up their accounts so that they -- and, if they want, their parents -- receive alerts that notify them via e-mail or text message if their balance reaches a minimum amount set by the student.

The report is the latest in a series of studies the Center for Responsible Lending has issued on what it considers to be abusive overdraft policies. A report in July found that banks and credit unions charged consumers an estimated $17.5 billion in fees on overdraft loans last year.