Debit and Prepaid Cards for College Students

Written by: John Landers

In the last survey taken concerning college student debt (April 2009), Sallie Mae, a financial services company that specializes in the college education sector, reports that the average college student in the U.S has $3,100 in debt. The study also shows that 84 percent of undergraduates have at least one credit card.

Parents looking for a product other than a credit card to help control the spending of college-bound children, and perhaps help them learn lessons about budgeting along the way, may want to consider using debit or prepaid cards. These cards provide popular alternatives to paying college expenses with cash or credit.

Both cards require cardholders to have funds on deposit in a personal account. Cardholders can use the cards without showing a photo ID to merchants. Debit and prepaid cards offer users convenience. Prepaid cards cost less than using credit cards because users do not have to pay interest.  Debit and prepaid credit cards can help prevent college students from overspending

Debit Cards

Debit cards work like a checkbook. Banking institutions issue debit cards, which link to customers checking and savings accounts. When customers purchase a product, the bank deducts the amount of the purchase from the checking account. The transaction does not require the customer to sign a receipt. Instead the customer enters a personal identification number to pay for goods or services.

A debit card eliminates the need for students to carry cash or a checkbook. Most merchants do not accept out-of-state checks, but do accept debit cards. In fact, debits cards can be use all over the world to eat at restaurants, buy gas, and make other purchases.

Refunds for returned products or canceled service are simply credited back to the customer’s account.  In addition, there are no concerns about writing a check when completing out-of-state transactions. Debit cards provide students an introduction to the financial system and assist them in learning financial habits without the pitfalls of falling into debt.

Prepaid Cards

Prepaid cards require users to load money on the card. Card issuers must place cardholder money into a custodial account. Most issuers assess activation fees and other charges for administering prepaid card accounts. Many prepaid cards include monthly fees and hidden service charges that may diminish card balances.  Some companies have eliminated monthly or annual fees.

Cardholders cannot spend more than the card balance and do not have to worry about overdraft fees.

Prepaid cards may not work effectively for teaching college students the various nuances of using a credit card, such as the importance of making credit card payments on time or the financial penalties incurred for over-the-limit spending. Nonetheless, a prepaid card offers some positives for imparting good financial habits.

Parents will have to use other tools for helping students learn the other lessons of paying on time and avoiding harsh financial penalties.

Regardless of whether you choose debit or prepaid cards for your college student, make sure you evaluate and compare cards fees and charges.  Debit cards may have ATM fees, monthly maintenance charges, and overdraft and NSF fees.

Prepaid cards issuers often advertise free direct deposit or no monthly or annual fees. Be aware of other charges for prepaid cards beyond activation and reloading charges, such as fees for checking the card balance or calling customer service.


Debit and Prepaid Cards for College Students

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