How Student Banking Works

Once you head off to college, it's time to replace your trusty porcine bank with something a bit more sophisticated.
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So you're going off to college, entering a strange new world. It's exciting, and perhaps a bit scary, but you should know that there's always somewhere you can go to to feel wanted. No, not your parents' house -- your old room is probably being redecorated right about now -- the bank. Any number of fine financial institutions will offer you everything from free checking to a free iPod to get you in the door.

Why? Because they love you and want you to be happy. No, wait -- that's your parents. The banks have other motives for their inviting behavior. The bottom line is, they want your business, and there are a couple of reasons for this, one slightly cynical and one, well, more cynical.


Ultimately, banks want to make you a loyal customer. Once a bank gets you in the door with a starter account, it hopes you'll go on to more lucrative things like taking out student loans, auto loans and home loans, running up credit card debt, and possibly taking out a home-equity loan to pay off the credit card debt so that you're a never-ending source of business (and income) for the bank.

In the short term, though, there are the fees. Lots and lots of fees. The Center for Responsible Lending reported that in 2008, U.S. banks took in $46.3 billion in various service charges and fees [source: Center for Responsible Lending]. You're looking for a place to keep your money, not a place to spend it, and while introductory offers can be a way to keep costs down, it's important to read the fine print and look at different kinds of accounts before you commit.


Student Banking: Checking Accounts

For many college students, paying bills is a new thing. You're on your own for the first time and will have to pay for a place to live, food, books and more. The easiest way to handle this is by opening a checking account. Almost every bank offers a student checking account -- think of it as a starter account -- that waives various fees and charges in an attempt to get your business. (Hint: Don't go for the free iPod -- hold out for important perks like waived fees instead.)

Up front, there's the matter of the monthly fee, which most checking accounts carry, but banks often waive for student accounts. There's also the minimum balance requirement. Sure, we'd all like to have a reserve of money, but sometimes things happen, especially if your income is limited to a part-time job and the occasional care package with a $20 bill tucked inside. Most student accounts come with a "no minimum balance" rule, too.


If those were all the charges associated with having a bank account, the banks wouldn't need all the fine print, and in some ways, the monthly charges and the fee for dropping below the minimum balance are the least of your financial worries. In the old days, choosing a bank was easy -- there was a bank nearby, and you opened an account there. But with ATMs and online banking, location matters much less than it used to.

Check the bank's agreement for fees associated with online banking, including bill paying and transfers between accounts. Find out where the bank's ATMs are located. Are they convenient to campus? On campus? Close enough that you'll be willing to walk there even if it's snowing? Keep in mind that there are charges for using ATMs that don't belong to your bank, not only from the owner of the ATM, but also from your bank. Some student offers include a certain number of out-of-network transactions a month, but remember the ATM owner will still charge you something, and those fees can add up.

The biggest threat to your financial well being, though, comes from overdraft fees. When you spend more money than you have, the bank covers it for you, but it charges a fee, sometimes as much as $35. If you keep charging, so will the bank, up to a daily maximum limit. (For how overdraft rules are changing under federal law, see the sidebar on the following page.) Look for a student account that limits overdraft fees, or better yet turns off overdraft protection entirely. It may be embarrassing to have that card turned down for a small purchase, but it's nothing compared to the feeling of getting hit with several hundred dollars in fees for something you could have done without.

Some banks offer the option of linking multiple accounts for overdraft protection, so if you don't have enough money for that skinny cinnamon dolce latte, they'll transfer some from a savings or credit card account to cover it. Those transactions can still put you over the savings account transfer limits, though, so you can end up paying fees for the transfer.

Speaking of savings accounts, let's take a look at those next.


Student Banking: Savings Accounts

For everyday bill-paying, textbook-buying, late-night-diner-visiting purposes, checking accounts are your best bet because they're convenient. But what if you want your money to do more -- like say make money? That's where a savings account comes in handy. The savings account is really the simplest form of bank account. You give the bank your money, they use it to do bank stuff like making loans to other people, and pay you interest for the privilege of using your money. Occasionally, you take out some money to live on, but for the most part, you leave it to earn interest and wait for a rainy day or sizeable investment like the down payment on a home. In a perfect world, that's all you would need. Really, right now you might be wondering why have a checking account? Why not have just a savings account? Well, it's a little more complicated than that.

It turns out there are limits on how many transactions you can make on a savings account. This isn't really the bank's fault -- there are actual federal regulations limiting you to six transactions per month on a savings account. Visiting a bank or ATM doesn't count toward the six-transaction limit, but if you do go over the limit, the bank will hit you with a fee or even change your account to a different kind that doesn't fall under the Federal Reserve Board rule [source: GPO Access].


OK, so savings accounts are a safe place to put your money, and the money actually grows as the bank pays you interest. As a trade off for that return, though, banks require a minimum amount of money in the account, and sometimes limit the number of transactions beyond what the federal regulations require. Bank of America, for example, is currently offering a student savings account with a $300 minimum balance and three transactions a month before they start charging you.

There are other savings options besides a savings account. You can also buy a Certificate of Deposit, which pays higher interest, but comes with the agreement not to touch your money for a certain amount of time (generally speaking, the longer the term, the better the interest rate, and the higher the return on your investment). Money market accounts are similar to savings accounts, but have higher minimum balances and pay correspondingly higher interest.

Most people know that money has a way of going out, sometimes just as fast as -- or faster than -- it comes in. So what do you do if you're strapped for cash, but have books to buy?


Student Banking: Credit Cards

According to a 2008 study by SallieMae, 84 percent of undergraduate students have credit cards, and by the time they're seniors, they've accumulated some $4,100 in debt, on top of whatever student loans they may have taken out [source: SallieMae].

Credit cards are the ultimate in convenience, and they're aggressively marketed to college students. Reportedly, today's typical college student carries 4.6 credit cards and $3,173 in credit card debt [source: SallieMae].


Credit cards seem to be a fact of life, and not just student life. In the long-term, using a credit card properly and paying off the balance can help establish a credit history and bump up your credit score, which will come in handy when you need an important loan, for a house or car, for example. Your credit score can affect even unrelated things like insurance rates. Credit cards also offer more protection for users than debit cards. Under federal law, the credit card holder is only responsible for the first $50 in fraudulent purchases in cases of theft or loss. However, debit card users are responsible for the first $500.

SallieMae found some good news in the fact that two-thirds of students had discussed credit issues with their parents, but 84 percent said they needed more information. The one-third who didn't get any guidance were more likely to pay their tuition with credit cards, and were more likely to be surprised when they found out how much they owed [source: SallieMae],.

While credit cards offer the easiest access to money, they make it easy to live outside your means. Less than one-fifth of students surveyed paid off their balance every month, and carrying a balance incurs finance charges, sometimes at a very high interest rate [source: SallieMae]. SallieMae found that almost 40 percent of students chose their first credit card based on direct mail, which is probably why students get so many credit card offers in the mail. But when the credit card offers flow in, be sure to read the fine print. Offers of low or no interest rates can evaporate, leaving you with a debt that climbs beyond your ability to pay it off.

Sometimes there's another option for students looking for extra cash: the time-honored tradition of asking your family for money.


Student Banking: Family Help

Dad might not always be nearby to hand you some cash -- but an online banking transfer should be just as quick.
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OK, so you're low on funds and you know that studio art class you just enrolled in is going to have a whopping supplies fee. What can you do? You could ask a family member for some money. Students often find themselves in similar situations. In fact, some students are fortunate to receive money regularly from their parents. Rather than having to drive to campus to deliver the cash, though, mom and dad have options.

They can mail a check -- but if you're in a pinch, that can take time. A faster option is to open a joint banking account with your parents, allowing you and your parents to have access to the account. The upside of this arrangement is that your parents can easily monitor the account and add more money when needed. The downside is that your parents can easily monitor the account -- meaning they'll see exactly where all that money is going. So if you say you're going to spend that extra $100 on a chemistry text, then your next $100 purchase better not be a concert ticket instead.


Online banking can be a less intrusive solution -- many banks allow transfers between accounts at the same bank, even between different people. So if your parents have accounts at Bank A, and your checking account is also at Bank A, a transfer can be done online, with little delay. Once again, though, read the fine print beforehand to determine how your bank handles transfers within the bank as well as transfers between different banks.

A more recent option is the pre-paid debit card. The pre-paid card industry touts the convenience of the cards, as well as their freedom from traditional bank fees (like the dreaded overdraft) but these cards come with fees of their own. A study by the Network Branded Prepaid Card Association puts the cost of the cards at between $200 and $300 per year (about $100 less if you have direct deposit), and they only work if the creditor you're trying to pay accepts plastic [source: NBPCA].


Student Banking After Graduation

All good things must come to an end, and unless you're that one undergraduate who can be called a ninth-year senior while still taking introductory classes for an undeclared major, you're going to get out of school (or at least you're planning to do so) at some point. Upon graduation, you'll get a job, and if you're really lucky, people will finally stop asking what you're going to do next.

The bank won't ask you that. In fact, it won't ask you anything. It will just take away your student status and all the free checking and low minimum balances that come with it. If you're lucky, the bank will notify you of the change, but it's not required to, and different banks have different cut-off dates. Some limit you to five years from the day you opened the account, while others go by age limit. However your bank does it, you'll need to keep track of it.


Since you're monitoring your bank account closely, this shouldn't be a problem, right? The bank will likely have a basic non-student account to switch your account to, with a different fee structure and different rules. Of course, the basics of avoiding overdrafts and spending only what you have still apply. However, as long as you're going through the whole getting-out-of-school life change, you might as well start shopping around again for the best banking deal.

For more information on student banking, personal finance and related topics, visit the links on the following page.


Lots More Information

Related HowStuffWorks Articles

  • Center for Responsible Lending. "Overdraft Explosion." 10/6/2009 (accessed 1/12/2010)
  • Cheng, Haiyang et al. "An Analysis of Personal Financial Literacy Among College Students." Financial Services Review. Vol. 7, no. 2, pp. 107-128. 1998
  • Code of Federal Regulations. Title 12, Chapter II, Subchapter A, Part 204 (accessed 1/14/2010)
  • Consumer Federation of America. "Overdrawn: Consumers Face Hidden Overdraft Charges From Nation's Largest Banks." June 9, 2005 (Accessed 1/12/2010)
  • FDIC. "Study of Bank Overdraft Programs." November 2008 (accessed 1/15/2010)
  • Feddis, Nessa. "Testimony of Nedda Feddis on behalf of the American Banking Association." 10/30/2009 (accessed 1/15/2010).
  • Flores, G. Michael. "Payment Systems Evolution and Branded Prepaid Card Analysis." October 2009. (accessed 1/14/2010)
  • Hayhoe, Celia Ray. "Differences in Spending Habits and Credit Use of College Students." Journal of Consumer Affairs. Vol. 34, no. 1, pp. 113-133. Summer 2000.
  • Lyons, Angela. "A Profile of Financially At-Risk College Students." Journal of Consumer Affairs. Vol. 38, no. 1, Summer 2004
  • SallieMae. "How Undergraduate Students Use Credit Cards." April 2009 (accessed 1/12/2010)
  • U.S. House of Representatives. H.R.3904: Overdraft Protection Act of 2009 (accessed 1/15/2010)