Swiped into Debt

Increasingly, colleges are forging agreements with credit card companies, whereby schools profit from student borrowing. It may be good business, but persistent credit card marketing on campus and subsequent heavy use by students is putting many on a fast track to debtors’ prison.

Credit card company – college deals take a variety of forms. A common deal revolves around what are called “affinity agreements,” whereby a colleges’ logo is emblazoned on a credit card. In exchange for a college’s imprimatur, the relevant credit card company sends back to the school in question, their alumni association, or their athletics department a share of revenue generated from student or alumni purchases.

The University of Tennessee, for example, used to have a multi-year affinity agreement with First USA worth $16.5 million. It’s now in the midst of a similar $10 million contract with Chase. Ohio State University, which enrolls over 60,000 students, has an affinity agreement arrangement with Bank of America, though the terms have not been disclosed.

Other credit card company – college deals involve institutions providing ready access to students and student contact information. Colleges provide credit card companies with personally-identifiable information about their students in exchange for cash payments. The companies then use the data — which can include permanent addresses, e-mail addresses, and local telephone numbers — to market credit cards directly to students. Some colleges go even further, providing companies with face-to-face access to students — allowing salespeople, for example, to set up marketing tents in central campus hubs.

Until recently, the University of Iowa had a deal with Bank of America in which the bank provided the school with $200,000 annually in exchange for students’ local mailing address (six times during the year), e-mail address (four times), local telephone number (twice), and current home address (once). Bank of America also was also allowed to market cards on campus 14 days a year. The level of access doubtlessly contributed to added financial strain to University of Iowa students who already carry some of the highest levels of federal and private student loan debt in the nation. [Note: After the Des Moines Register ran a series of articles calling attention to the arrangement, the University of Iowa renegotiated its deal.]

Nationally, big money is involved in these credit card company – college deals. According to BusinessWeek, Bank of America has agreements with roughly 900 colleges across the United States. A credit card industry survey estimates that as of the end of 2006, 320 million college-affiliated credit cards were in use, accounting for $849 billion worth of transactions. Revenue sharing with institutions of higher education resulted in an estimated $1 billion in transfers to the nation’s 300 largest colleges.

Debtor Nation

Students pay a heavy price for credit card companies’ hefty profits. A recent survey by a federation of public interest groups (U.S. PIRG) found that college seniors who didn’t pay off their monthly credit card statement reported carrying an average balance of $2,623. Those with student loans reported even more debt. College seniors with previous defaults carried an average balance of $4,116. But the credit card companies aren’t just interested in student borrowing.

Going after students is a long-term play by credit card companies. Investing millions to gain access to campuses may seems like a substantial payment, but students are a captive and inexperienced market likely to generate both short, and more importantly, large, long-term returns.

Over 70 percent of students keep their first credit card for years, meaning companies can attract thousands of potential lifetime customers for what is essentially a pittance given how much customers will rack up in future credit card debt. The average American credit-card holding household owes $9,659 on their cards; that’s 226 percent higher than the same figure in 1990. About two million American households owe more than $20,000 on their credit cards.

We’ve seen the myriad and creative ways schools use revenue deals with private businesses to sell out their students and put them at risk of severe financial difficulties. Maybe the schools should start thinking about long-term plays just as the credit card industry does. It’s pretty hard to make alumni donations when a large share of your monthly income is going to pay off the plastic.