Congress Takes on Credit Cards

Ben Miller of New America’s Education Policy Program steps in as guest blogger on The Ladder to share his thoughts on the credit card legislation currently under consideration in the Senate and its effects on college students.

Congress is poised to strictly limit a form of debt that is aggressively marketed to college students, often with the assistance of institutions they attend, and that contains confusing terms and conditions and dangerously high interest rates.

This debt doesn’t come with a promissory note, it’s plastic.

At the end of April, the U.S. House of Representatives easily passed a bill known as the Credit Cardholders’ Bill of Rights. If enacted, that measure would limit some of the most egregious credit card company practices, including marketing their products to underage students. The Senate is considering its own version of the legislation this week, and in many ways it is harder on the credit card companies that the House bill.

While we applaud these measures, we would like to see Congress go further and provide more sunshine on the lucrative arrangements some colleges and universities have forged with credit card companies that have enabled them to profit off of their students’ indebtedness.

The House and Senate bills primarily focus on restricting some of the most notorious credit card billing practices, such as double billing, a way of calculating finance charges that hurts borrowers with fluctuating balances. Both bills would also take noteworthy steps to tackle the growing credit card debt burden being taken on by students.

Just how bad a problem is it? A report recently released by Sallie Mae found that 84 percent of students sampled had at least one credit card and that their average balance was $3,173. Sallie Mae’s numbers are slightly higher than, but consistent with, figures published in a study last year by the U.S. Public Interest Research Group Education Fund, which found that 64 percent of its students surveyed had at least one credit card, with average balances ranging from $1,301 for freshmen to $2,623 for seniors.[1]

The House bill would ban creditors from issuing cards to anyone under the age of 18, unless they are completely independent of their parents or have an older co-signer. The House bill also would cap the level of credit for which full-time college students between the ages of 18 and 21 are eligible to an amount equal to the greater of 20 percent of gross income or $500.

The Senate version includes a similar prohibition to the one in the House bill but would extend it to dependent students who are under 21.These students, however, could earn an exemption to the ban if they complete a course in financial literacy.

These measures should certainly help lessen the ballooning growth of credit card debt among students. But they fail to address the role that some of the largest public universities have played in making their students easy prey for credit card companies.

As we wrote last year, many students first get exposed to credit cards as a result of revenue deals made by cash-strapped public colleges that have seen decreases in state funding. These arrangements give creditors access to student records, advertisement opportunities, and the right to use institutional images and symbols in exchange for giving schools either flat payments or a share of purchases made. (Last year’s reauthorization of the Higher Education Act banned many of these practices for private student loans, but did not touch on credit cards.)

Unfortunately, the exact terms and conditions of these arrangements are almost always secret (Jessica Silver-Greenberg at BusinessWeek has done an excellent job getting the details for a few of these contracts and covering this issue generally.) But the few examples that have to come to light are certainly troubling. For instance, Michigan State University, which received $8.4 million over seven years from Bank of America, agreed to allow the bank to provide discounts to students that used its credit card to make purchases at the campus bookstore. The University of Michigan got an even sweeter deal from Bank of America — $25.5 million over 11 years, plus $6 annually for each student with a credit card account with the company. Public universities in Iowa, Ohio, and Tennessee, among others, have also made similar deals.

Reps. Patrick Murphy (D-Penn.) and Thomas Petri (R-Wisc.) attempted to tackle this issue by offering an amendment to the House bill that would have required all creditors to report the terms and conditions of any deals they had with colleges. Most importantly, it would have required creditors to report deals with affiliated organizations, such as alumni associations and sports foundations. These groups are often the ones that actually enter into deals with creditors and then have a memorandum of understanding with their affiliated universities. While this arrangement might seem inefficient, it has numerous benefits for the universities because these alumni or other affiliated groups tend to be private organizations, meaning they are not subject to state open records laws.

Unfortunately, the amendment did not make it into the House-passed version of the legislation, as the Rules Committee found that it was not germane to the legislation — a common tactic employed in the House when leaders do not want to deal with an issue.

If the past is any indication, bringing sunshine to credit card deals is one of the most effective ways to get creditors and institutions to change their practices. For example, the University of Iowa renegotiated its contract with Bank of America after the Des Moines Register revealed that the original deal had entailed the selling of students’ personal information to the giant financial company. Requiring colleges to publicly release their contracts would probably be the most effective way to get colleges to reconsider entering these types of arrangements.

For years, some of the nation’s largest public universities have worked hand-in-hand with credit card companies to swipe their students into debt. If Congress is serious about limiting students’ exposure to credit cards, then it should not ignore the role colleges have played in encouraging students to take on this costly debt.

Image used under a Creative Commons license from flickr user TransplantedVTer

[1] Sallie Mae’s sample uses credit bureau reports for students applying for private loans. As a result, the figures may be a little skewed since it seems likely that those who apply for private loans are likelier to be financially needy. The U.S. PIRG study, by contrast, used surveys given to students for its results and also had a larger sample size.