Student loan giant Sallie Mae is at the center of a recent lawsuit that lays out the challenges facing the financial aid payment and reimbursement business and its hidden costs to students.
The civil suit, filed August 30 in New York State Supreme Court by prepaid card provider Green Dot, accuses Sallie Mae of "using and abusing a business partner for its own collateral goals, casting that business partner aside, and brazenly disavowing its contractual obligations when those goals were realized."
Heavy stuff. But basically the suit alleges that Sallie Mae locked Green Dot into an exclusive agreement to provide "refund disbursement" — prepaid cards that students use to access financial aid besides their tuition — at the same time that Sallie Mae was negotiating to sell its refund disbursement business, called Campus Solutions, to Higher One, the biggest and most controversial player in the industry. Green Dot alleges the sale of Campus Solutions to Higher One violated its partnership with Sallie Mae without proper compensation.
Green Dot and Sallie Mae entered an agreement in June 2012 under which Green Dot would issue and manage a prepaid card program. According to Green Dot's allegations, however, Sallie Mae "inexplicably delayed" the program's launch and then, as a result of selling Campus Solutions to Higher One, deprived Green Dot of an estimated $130 million in future profits. (not to mention the money Green Dot spent to ramp up the program)
Green Dot is asking for $90 million and attorney fees. Representatives for Green Dot, Sallie Mae, and Higher One all declined to comment, citing the ongoing legal dispute.
Companies like Higher One and Green Dot that are contracted by schools make little money from simply transferring funds to students, so they impose fees and other costs to generate revenue from students to make a profit. The lawsuit underscores the problems inherent in outsourcing financial aid disbursement at cash-strapped schools and the hidden costs of it to students.
For instance, Higher One said it acquired Campus Solutions from Sallie Mae because it could more efficiently convert disbursement customers into checking account customers. In a conference call with analysts about the merger, Higher One chairman Miles Lasater said that Sallie Mae's ability to market their debit card was "significantly lower" than Higher One's and Higher One's chief financial officer said that "if we can convert those people…it becomes very lucrative for us."
Higher One serves schools with 4.8 million students and has 2.2 million checking account customers.
In reality, however, Higher One's revenues have barely budged over the last year after it had to eliminate some of its checking account fees following consumer advocate pressure and an $11 million FDIC settlement last year. Prior to the sale to Higher One and while it was negotiating a partnership with Green Dot, Sallie Mae's own disbursement business was losing money.
Higher One's strategy for dealing with lower fees on debit transactions is to charge some of its account holders 50 cents for every PIN-debit transaction. Only about five percent of the debit card industry charges any fee for pin-based transactions — Green Dot's basic debit card doesn't charge fees for either a debit- or PIN-based transaction, for example.
Another difference between the Green Dot product and Higher One's basic OneAccount is ATM access. Democratic Congressman George Miller has specifically criticized Higher One for having a meager ATM network, with only about 700 on campus ATMs that students can use without incurring a $2.50 fee (other Higher One accounts allow access to a broader network). Green Dot, on the other hand, claims that it would allow students using its reimbursement cards access to 22,000 no-fee ATMs.
So it's not surprising that Green Dot's lawsuit positions it as the low-cost, customer friendly financial aid disbursement provider, in contrast to Higher One, which has been a popular target for consumer advocates for years. The suit claims that "Green Dot's lower cost, consumer-friendly prepaid product was well-positioned to capitalize on the "negative sentiment surrounding" other financial aid refund products, specifically referring to a report by the US Public Interest Research Group that strongly criticized Higher One and included one reference to Green Dot.
Green Dot also claims that Sallie Mae was partnering with it specifically because its products were cheaper than the competition. The plan, negotiations for which started in November, 2011, was that Green Dot would manage and issue "low-cost, consumer-friendly GPR cards" that would then be branded by Sallie Mae or Sallie Mae's clients, namely colleges and universities. Sallie Mae's existing payment reimbursement clients would use the cards, with Sallie Mae's active marketing and encouragement. The suit says that the new "MyFlexCard" card "was to be Sallie Mae's core product for its Campus Solutions business." Green Dot claims that throughout the entire negotiation Sallie Mae "insisted on exclusivity," specifically worried that Green Dot might partner with Higher One.
The companies also agreed that if Sallie Mae terminated the agreement, it would pay a fee of $80,000 for every month left in the original two year term.
On August 22, 2012, Sallie Mae announced its partnership with Green Dot, saying it would offer a refund product with "no fees for insufficient funds and no penalty fees" that could be reloaded at any of Green Dot's 60,000 retail locations. But Sallie Mae then delayed the October 23 launch date "ostensibly due to issues in its information technology division," Green Dot claims. With the help of Sallie Mae executives, Green Dot claims it released a statement saying that "both Green Dot and Sallie Mae believe that they could attract large numbers of colleges and universities in the 2013-2014 school year."
But Green Dot said it was then "blindsided" in January when Sallie Mae's Executive Vice President of Banking/Finance, Joseph DePaulo, called Steven Streit, Green Dot's CEO, to inform him of the sale of Campus Solutions to Higher One. Green Dot claims that DePaulo told Streit both to continue working on the joint program and that Sallie Mae would pay the agreed termination fee of $4.8 million if it exited the partnership. In addition to continuing work on the project, Green Dot alleges that Sallie Mae insisted it keep secret the sale of Campus Solutions "form Sallie Mae's project development team."
On May 7 of this year, Higher One announced its $47.25 million purchase of Campus Solutions. Higher One CEO Mark Volcheck said of the deal, "We are excited to increase the breadth of Higher One offerings and expect to continue to bring best practices for refund disbursement services, payment processing services, and data analytics to now more than 1,600 campuses and more than 13 million students nationwide." Higher One then announced that it would be moving as many of Sallie Mae's former clients to its own disbursement platform.
The lawsuit stems from the failure of Green Dot and Sallie Mae to reach a settlement over terminating their agreement. If the claims of Green Dot's suit are correct, Sallie Mae thought it was impossible to profit from financial aid disbursement without aggressive marketing and high costs, and Green Dot never got the chance to prove them wrong.