Beware of Overdraft Fees

Parents who send their kids off to college for the first time often discover an expense they hadn't reckoned on: hundreds of dollars in overdraft fees on their kids' checking accounts.

Before overdraft fees became common, banks typically denied a transaction when an account holder didn't have enough money, and charged the customer a one-time fee for insufficient funds. Now, a debit or check transaction that exceeds your balance will clear, but the bank charges a penalty of as much as $35 in addition to the amount you owe for the transaction. And you can end up paying multiple fees if you're not aware that you have a negative balance.

College students are particularly vulnerable. They don't always keep close tabs on their account, and they often use their cards for small purchases before they realize they're over the top. A latte here, a bottle of shampoo there, and a hamburger at Wendy's can add up to $100 in fees. (Cynics might wonder if banks are trying to ride their way back to profitability on the backs of college students.)

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To avoid these maddening charges, or at least minimize them, students and their parents have a number of options:

• Ask the bank to waive the fee. This really works, especially if you're a good customer or your child makes an occasional mistake. When my friend's son, Ian, ran into trouble the first time, his bank halved his overdraft fees; the second time, it removed one of them.
• Switch to a financial institution that doesn't charge multiple fees -- usually a small bank or credit union. Just be aware that your child's debit card will be denied or his check will bounce if he doesn't have enough money in his account. And he'll still be charged a one-time fee of as much as $35.
• Link your child's checking account to a savings account or line of credit to provide a safety net. The bank will charge interest on a line of credit, or $5 to $10 to transfer money from another account. But that's still cheaper than multiple overdraft fees.
• Switch to a prepaid card. But note that these cards, too, often charge fees to transfer funds, make ATM withdrawals, or sometimes even for overdrafts.

Of course, the real solution is to have kids keep closer tabs on their money. Several students have told me that checking their balances online has helped them cure chronic overspending.

But kids won't have much incentive to shape up as long as Mom and Dad are willing to pay the penalties or top up the account. Encouraged by his father, Ian got a job at the fine arts library to help cushion his account. Way to go, guys.