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Loan Processor Rips Off Students, Class Claims

VENTURA, Calif. (CN) - A class action claims that a financial services company and its bank partner prey on college students by coercing them into handing over financial aid money and charging them exorbitant fees to access the funds.

Lead plaintiff Sherry McFall, a student at Ventura College, claims Higher One automatically creates bank accounts for unsuspecting college students, the collects deceptive and improperly disclosed bank fees when the students access their money. She sued both Higher One Holdings and The Bancorp Bank, in Ventura County Court.

"Higher One has arrangements with hundreds of colleges, including Ventura College, whereby a student's grant, scholarship and/or loan money is automatically deposited into a Higher One bank account without the authorization or consent of students. Colleges and universities, including Ventura College, send student mailing address and email address information to Higher One without receiving consent to do so," McFall says in her complaint.

Even before a student enrolls, "Higher One uses this information to begin sending marketing mail and email to students, encouraging them to use Higher One banking services for their financial aid refunds, which are a student's financial aid money (whether from grants, scholarships or loans) left over after the school deducts its tuition and fees," the student claims. (Parentheses in complaint.)

McFall says Higher One disclosed to investors its marketing strategy of extracting fees from students in its IPO prospectus in 2010:

"'Once we enter into a contract with a higher education institution, we begin focusing our marketing effort on the institution's students ...

"We work closely with our higher education institutional clients to communicate the benefits of our products and services through school-branded communications and literature in an effort to increase both the number of new OneAccounts and usage of existing OneAccounts ...

"Typically, we will send information to parents and incoming students soon after their admission applications are accepted by the school and during student orientation. We generally contact returning students before the beginning of a new semester and place signs in strategic campus locations such as bookstores, student centers, dining halls, athletic facilities and cash dispensers to increase awareness of our products and services ...

"In an effort to strengthen our relationships with students, we often sponsor and support on-campus events and create a co-branded website with the higher education institutions ...

"Our higher education institutional clients provide us with student email addresses that we commonly use to communicate with students about our products and services ...'"

McFall says the before the beginning of a term Higher One sends students an email stating that their college "'has partnered with Higher One to provide a new method for receiving financial aid disbursements to all ... students. It is called the [name of college] Debit Card. If you have received your Higher One card and are expecting financial aid, please activate the card and choose your disbursement preference right away to avoid any delays to your disbursement.'

"In such emails, and by use of the term 'partnered,' Higher One falsely implies to students that it is the college's preferred provider of banking services." (Brackets and ellipses in complaint.)

McFall claims that Higher One uses marketing channels to tell students they will get their financial aid refunds more quickly and "immediately" if they choose Higher One and that their financial aid disbursements will be "delayed" if they do not.


"Upon information and belief, these representations are false or, if they are true, a refund is 'delayed' only by the actions of Higher One. For example, to elect to use a different bank, a student has to print out a form and mail it to Higher One. On the other hand, students can complete the entire Higher One registration online," the complaint states.

"Because Higher One automatically opens accounts for students, into which financial aid money is deposited, students are required to use the Higher One website in order to receive any financial aid refund whatsoever. On the Higher One website, they are pressured to use the Higher One account. Indeed, if students do not open a Higher One account, they are penalized and often forced to wait up to a month to receive their financial aid refund - a refund which in many respects is a student's only source of support. Beyond failing to disclose fees, this creates disincentives to using another bank.

"Higher One does not adequately disclose that students may elect to use their financial aid refunds via methods other than a Higher One account. Further, upon information and belief, Higher One encourages the colleges and universities to withhold this information from students."

McFall says Higher One's marketing emails tout the speed of its refunds, but fail to mention the myriad fees students will pay for using the company's services - or that students have options other than Higher One.

"When students, without their consent and without requesting it, receive their Higher One debit card in the mail, they are directed to a Higher One website to receive their financial aid refund. In this mailing, Higher One does not adequately disclose the fees students will be subjected to (or students' inability to reasonably avoid such fees)," the complaint states.

"Marketing materials produced by Higher One tell students that when they choose a financial aid refund preference, 'Easy Refund is the fastest delivery method. By choosing this option you'll be choosing to open a no-monthly balance, no-monthly fee FDIC-insured checking account tied to the debit card.' In such marketing materials, Higher One never discloses the fees it does charge students for use of their financial aid money (or students' inability to reasonably avoid such fees). Nor does Higher One disclose these fees (or students' inability to reasonably avoid such fees) prior to requiring students to agree to use a Higher One account on the Higher One website. ...

"Higher One does not make fee information easily accessible. To find the actual fees charged by Higher One requires clicking through three pages from the Higher One homepage - including a page deceptively filled with all of the free services offered by Higher One - before finally getting to the fee-based services page. Plaintiff was deceived and class members were likely to be deceived by Higher One's marketing and attempts to get them to use a Higher One account.

"Higher One knowingly targets particularly vulnerable customers (college students) with its marketing, mailings, website and disclosures. College students are less sophisticated than ordinary customers, especially on matters of finance. According to a 2008 study by the Jump$tart Coalition for Personal Finance Literacy, more than two thirds of college-bound seniors fail the nonprofit's 31-question literacy test."

"In sum, Higher One does not provide adequate disclosures of the excessive and unconscionable fees it charges to students prior to or after the time Higher One accounts are opened. Nor does Higher One provide a fee schedule at the time Higher One accounts are opened on students' behalf; in fact this information is made available to students only if a student searches out the information on Higher One's website."


McFall claims that Higher One also falsely represents that its services are endorsed by the students' colleges and universities.

"A school's emblem is featured in the letterhead of student communications from Higher One and on the debit cards issued by Higher One. However, Higher One is not endorsed by, nor is it the preferred banking provider of, a student's college or university," the complaint states.

Higher One's tactics are extraordinarily successful, McFall says: Not only did she not realize she had the option of having her financial aid refund deposited into the bank of her own choosing, the vast majority of students at colleges and universities are also duped by the company.

"In practice, most students end up receiving their financial aid refund through Higher One. In 2009 for instance, 76 percent of the students at participating colleges chose to bank with Higher One rather than choosing another bank, according to filings with the Securities and Exchange Commission. In short, Higher One has leveraged its relationship with colleges and universities to make itself essentially the de facto or default choice for banking on these campuses," the complaint states.

A student who decides to move financial aid disbursements to another banking institution is charged $25, which McFall says is the last in a long line of fees Higher One charges students to get their own money.

She says the company, which is not a bank, aggressively markets the debit function of its card - from the word DEBIT emblazoned across the front of the card in three places, to account orientation videos on the Higher One website in which actors tell the students they can use their "card anywhere a debit MasterCard is accepted, on campus or off."

The complaint continues: "And after opening an account, Higher One sends emails to students stating: 'Now it's easier than ever to spend with speed and safety using your VCCCD Debit Card instead of cash! As you requested, your recent Ventura County Community College District refund has been deposited as an Easy Refund to your OneAccount. Your OneAccount is a full-service, FDIC insured checking account. Once your refund money is deposited to the account, you may immediately begin using your VCCCD Debit Card to spend it at millions of locations worldwide where MasterCard is accepted.'

"Yet students who swipe the card as a 'debit' and enter their PIN get charged a 50-cent PIN-based transaction fee by Higher One each time. The only way to avoid that 50-cent fee on every purchase is to press 'credit' and sign the receipt. However, Higher One does not adequately disclose this fact to students, and actually misleads students by placing the term 'debit' on the card and by referring to the 'debit' MasterCard in disclosures and marketing materials, when in fact the student must select the 'credit' option in order to avoid the fee."

"In other words, Higher One deceptively tells students on the face of the card and in marketing materials and disclosures that it is not a credit card. Nonetheless, a student must use it as a credit card in order to avoid being charged the fee," McFall says.


"This deception and lack of disclosure is targeted to college students, who in many cases are less sophisticated than ordinary customers on matters of finance. Upon information and belief, Higher One's deception and lack of disclosure is designed to increase its bank fee revenue."

McFall claims that more than 50 percent of Higher One's accountholders incur at least one PIN-based fee, which is "immoral, unethical, oppressive, unscrupulous and substantially injurious to consumers. Had Higher One not bombarded students with deceptive marketing and failed to disclose the excessive bank fees Higher One charges, students could easily have chosen a bank which offered similar services but did not charge, for example, PIN-based transaction fees," McFall says.

She claims Higher One also charges a $2.50 fee for transactions at non-Higher One ATMs, in addition to the fees charged by ATM owners. She say it costs $4.50 or more to get her own money at these machines, a fact not disclosed at the ATM terminal or anywhere else but on a page buried in the Higher One website.

"Charging students upwards of $4.50 for an ATM withdrawal is immoral, unethical, oppressive, unscrupulous and substantially injurious to consumers, especially so since Higher One ATMs are exceedingly rare, and are not available to students at all hours. Therefore, students cannot reasonably avoid such fees," the complaint states.

"For example, only two Higher One ATMs serve the entire Ventura College campus (with over 14,000 students), and even those ATMs are inaccessible after hours. One of the Ventura College Higher One ATMs is inaccessible for over a month during winter vacations, when the campus center in which it is located is closed. Accordingly, students often have no choice but to use non-Higher One ATMs in order to access their money."

McFall claims that Higher One's ATM and PIN-based point of sale practices violate federal regulations requiring financial institutions to provide an accurate receipt at the point of transaction, including total cost and any fees associated with the transaction.

"Higher One does not disclose either PIN-based Transaction Fees or Non-Higher One ATM fees 'at the time the consumer initiates an electronic fund transfer.' These are 'transaction fees' that must be 'disclosed on the receipt and displayed on or at the terminal,' per Regulation E. Plaintiff would not have made certain debit card purchases or ATM withdrawals had Higher One properly disclosed the fees it would charge," according to the complaint.

"Higher One's policies and practices are or were unconscionable in the following respects, among others. Higher One:

"a. Automatically opens Higher One accounts on behalf of students and deposits financial aid money into such accounts without consent;

"b. Deceptively encourages students to use Higher One accounts without disclosing the true nature of those accounts, including excessive and unusual usage fees;

"c. Imposes contractual forms upon consumers without providing consumers with the ability to review or approve the terms of those contracts prior to account opening;

"d. Deceptively represents that Higher One has the endorsement of, or is the preferred banking provider of, a student's college or university;

"e. Deceives students about, and does not adequately disclose, PIN transaction fees;

"f. Does not provide a means by which students can reasonably avoid PIN Transaction Fees;

"g. Does not adequately disclose non-Higher One ATM transaction fees;

"h. Does not provide means by which students can reasonably avoid non-Higher One ATM transaction fees;

"i. Charges students, in effect, two service fees for every non-Higher One ATM withdrawal;

"j. Requires their customers to enter into standardized account agreements which include unconscionable provisions;

"k. Does not alert its customers that a debit card transaction or ATM transaction will trigger a PIN-based transaction fee and non-Higher One ATM fee, and does not provide the customer the opportunity to cancel that transaction before assessing such fees; and

"l. Forces students to use financial aid loan money to pay bank fees, exponentially increasing the cost of such bank fees."

McFall adds: "Because many of these improperly charged fees were in many cases paid with borrowed money, students are effectively paying interest on these fees."

She seeks class damages for unfair competition breach of contract, conversion, unjust enrichment, and consumer law violations.

McFall is represented by Hassan Zavareei and Jeffrey Kaliel, with Tycko and Zavareei, of Washington.

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