College Credit: How Much? How Soon?

  In a recent segment of the Comedy Central news satire The Daily Show, a mop-headed young reporter jokingly advised college students and recent graduates to apply for several credit cards, run the card balances to the limit, then open more card accounts.
  The segment also showed a clip from the documentary "Maxed Out," which critiques the American credit culture, from mortgages and credit cards to the national debt. The scene showed a man behind the table of an outdoor marketing booth who says, "You want to fill out a Visa application? You get a free T-shirt." The The Daily Show reporter liked the idea. "Open up 30 accounts and you don't have to do laundry for a month!" he gushed. "Take that, Mom!"
  Both "Maxed Out," which hit theaters in March and was released on DVD in June, and "In Debt We Trust," a documentary released last year, examine the problems of American consumers drowning in debt. And both devote segments to the practices and ethics of marketing credit cards to college students.
  The films have drawn mixed reviews. But they and other critical media coverage have renewed debate about how much and what type of marketing to college students is appropriate.
  That debate is again driving an increase in federal and state laws restricting marketing and issuance of credit cards to young consumers.
  Nellie Mae, which supplies student loans, releases the most widely cited statistics about undergraduate student debt every few years, based on information provided by credit-reporting agencies on consumers applying for student loans. In its most recent report, published in May 2005, Nellie Mae found that 76% of undergraduates began the 2004 school year with credit cards, down from 83% who started the 2001 school year with them.
  Furthermore, the average outstanding balance on cards held by undergraduates was $2,169 in 2004, down 7% from an average balance of $2,327 in 2001 but up 15% from $1,879 in 1998, when Nellie Mae released its first report on student card debt.
  "The fact that average credit card usage-outstanding debt, the percentage of students with cards and the average number of cards-has declined among undergraduates in the past three years can be viewed as a sign that the message to use credit responsibly is reaching its intended audience," Nellie Mae analysts wrote in the report.
  Whatever messages had or had not reached students, a majority of cardholding students still carried balances on their cards. When Nellie Mae surveyed students for its 2005 report, 21% said they paid the entire balance on their credit cards each month, 12% said they made minimum payments, 8% paid off some cards in full but not others, and 44% paid more than the minimum but always carried a balance. Eleven percent said they made less than the minimum payments on some or all cards each month, and 4% said their parents paid their credit card bills.
  Some of those card balances come from such frivolities as fashion, electronics and Spring Break trips. But many students use revolving credit lines to fill funding gaps for unavoidable expenses of higher education, such as tuition, books and fees.
  "Financial aid, including loans and grants, have failed to keep up with the rising cost of tuition and, in many cases, have been drastically slashed," says Myra Batchelder, policy analyst for the Demos Economic Opportunity Program. "Many students are turning to credit cards to help pay for tuition and other school-related expenses."
  As founder and director of the Student Money Management Center at the University of North Texas in Denton, Paul Goebel has counseled hundreds of students who have gotten into card debt. He is concerned about an increase in the number of students coming to the center owing "tens of thousands of dollars" to card issuers.
  "Originally, they would come in with [credit card] debts of two, three or four thousand dollars and be very concerned," he says. "The other end of the spectrum are debts that are actually insurmountable, with interest rates of 25% or 30%."
  Goebel says he estimates the average level of card debt among the university's students seeking counseling is now about $10,000. The highest student card balance Goebel has seen is $40,000, with an interest rate of 32%.
  The center opened in October 2005, a month after the university banned card marketers from setting up booths on campus to offer students T-shirts, food and other freebies in return for filling out applications. "Now they go right across the street to the sandwich shop and set up there," Goebel says. He would not say which cards the marketers solicit there but says they are not hired by major issuers.
  Out of 2,000 four-year colleges in the U.S., 1,280 prohibited credit card marketing booths on campus in 2006, according to United College Marketing Services, an Oak Brook, Ill.-based company that markets cards to college students.
  AFFINITY PROMOTIONS
  Many of those same colleges allow marketing booths at athletic events as part of affinity programs that target alumni and students. In 2006, United College Marketing Services counted 4,700 college affinity card programs, with some schools participating in more than one.
  Marketing cards to students also has been the subject of attempted and successful legislation in 25 states. According to the State Banking Law Reporter, eight states have passed laws regarding on-campus card solicitations, including Arkansas, California, Hawaii, New York, Louisiana, Pennsylvania, West Virginia and Texas.
  Texas' new law, which takes effect this month, limits on-campus card marketing to times and places chosen by the governing board of the college or university. Posters, fliers and forms to be returned to the issuer fall under those restrictions, according to the law.
  At the federal level, Rep. Carolyn Maloney (D-N.Y.), chair of the House Financial Institutions subcommittee, last month proposed reforms that would require different underwriting standards for groups with "special needs or limited incomes," including students (see story page 8).
  Despite the controversy over free T-shirts, they are not necessarily the most effective card-marketing channel. In 2005, only 18% of students told Nellie Mae surveyors they obtained their first credit cards because of vendor booths or tables on campus.
  According to the survey, direct mail drew the most students, 35%, to apply for their first cards. Issuers also reach students through telephone and e-mail solicitations, often using student contact information that open-records laws require public universities in many states to give to any requester.
  PARENTAL ADVICE
  Parents may be glad to know that 26% of students told Nellie Mae in 2005 they applied for their first cards because of referrals from mom and dad.
  Goebel believes credit cards can be useful tools for students, but he wishes issuers would stop all marketing to students. "Give yourselves a break for a few years until young people are starting their careers," he says. "They do not need to be distracted by having an open flood gate of credit card applications."
  FIRST CARDS
  U.S. Bank is the largest issuer of campus cards in the country. The bank partners with 29 colleges to add checking account debit functions (along with a U.S. Bank logo) to campus cards that students already use for identification, security and access to prepaid accounts for such on-campus expenses as meals and library printer copies.
  Some of those agreements prohibit U.S. Bank from marketing credit cards to students on campus; others allow it with various conditions or restrictions.
  Lynn Heitman, senior vice president of retail payment solutions at U.S. Bancorp, agrees that some issuers have targeted students merely for their card-revenue potential. But she says most banks angle to be the providers of the first credit cards, demand-deposit accounts or school loans young consumers have because they will be most loyal to that first bank as they age, earn more money and seek services such as mortgages and investment accounts.
  A Bank of America Corp. spokesperson agrees. "We look to bank the entire relationship, and students have a need for checking accounts, check cards and ATM access as well as credit cards," she says. BofA acquired one of the largest college affinity card programs when it bought MBNA in 2005.
  BofA also has a variety of marketing arrangements, from being allowed to set up booths on campus to limiting on-campus marketing only to athletic events that draw both alumni and students.
  The BofA spokesperson says the bank does not report charge-offs that apply specifically to student cards. Heitman says she cannot disclose U.S. Bank's student card charge-off rates.
  Issuers must navigate the limits each school sets for marketing to its students, according to Heitman. "The first thing that we do is understand what the university feels about marketing to students and fit in what they've defined as important to them," she says.
  While Heitman agrees that some issuers have distributed cards irresponsibly, she finds unfair the criticism that issuers do not care whether students will be able to handle the revolving credit they are given. "That's probably the biggest misunderstanding out there," she says. "None of us would be in business if we were willing to give every student a card. It's in our best interest to care long term."
  Regardless of whether most issuers feel similarly, marketing cards to students will continue to be controversial, particularly the on-campus tables and booths offering freebies.
  "There is a general feeling among college students that it's kind of dirty, for lack of a better word," Goebel says. He says students often call him to report marketers setting up near campus, and many more students tell him they go for the free clothing or food but fill out forms with fictitious names and contact information.
  (c) 2007 Cards&Payments and SourceMedia, Inc. All Rights Reserved.
  http://www.cardforum.com http://www.sourcemedia.com