Chronicle of Higher Education
10-29-07
Battle Over Colleges and Credit Cards Reaches Showdown in Iowa
By PAUL BASKEN
For more than a decade, American universities have fended off complaints that
they take millions of dollars from banks that issue college-branded credit cards,
while leaving some of their own students staggered by mounting loan debt.
Today, after weeks of revelations into the details of those arrangements at Iowa's
leading public universities, the state legislature in Des Moines begins hearings
that critics hope will help stem the practice in Iowa and nationwide.
"Sooner or later, somebody's going to be held accountable" for the students
whose careers and lives are ruined by such marketing practices, said Robert D.
Manning, a professor of finance at the Rochester Institute of Technology, in New
York State, who has waged a 15-year campaign on the issue.
In Iowa, advocates hope to force state universities to end partnerships with
credit-card companies and to provide the students with better education about
the risks of credit. Meanwhile, some members of Congress are pursuing
legislation that would limit how much credit students can obtain with their cards.
The banking industry, however, argues that the risks are vastly overblown, and
its lobbyists have been staving off proposed restrictions for years. Fewer
undergraduates are using credit cards, and those who have cards use them with
greater understanding of the risks and benefits, than in past years, said Eric Weil,
managing partner for Student Monitor, which provides market data on students to
American corporations.
"My sense is it's much ado about nothing because ultimately this isn't something
that's foisted on a student," Mr. Weil said. "A student doesn't have to sign up for
that credit card. They can do what they want."
Lucrative Relationships
Bank of America, the company at the center of attention in Iowa, has marketing
arrangements on about 700 American campuses, mostly with alumni
associations, athletics departments, and related foundations, said Betty Riess, a
spokeswoman for the bank. The on-campus sales arrangements typically result
in alumni groups collecting 20 to 50 cents for every $100 of credit card
purchases, The Des Moines Register reported.
"Our objective is to create the foundation for a long-term banking relationship and
help students build a good credit history that enables them to achieve their
financial goals," Ms. Riess said.
The bank has credit-card partnerships with several institutions of higher
education in Iowa, including Iowa State University, the University of Iowa, and
the University of Northern Iowa. Those relationships drew criticism after The
Register began detailing them in a series of reports last month.
The newspaper said the credit-card contracts generated millions of dollars a year
for the institutions' privately run alumni organizations, rather than the universities
themselves, while contributing to the burden on students, many of whom
graduate with combined debts of $25,000 to $30,000 apiece.
After initially resisting the newspaper's requests for details of the contracts,
saying the alumni groups are privately controlled organizations, university
leaders made the contracts public and have been talking in recent days of
changing their policies toward credit-card agreements.
Iowa State's president, Gregory L. Geoffroy, called for an end to the alumni
group's practice of marketing ISU-branded credit cards to students, and the
University of Iowa's president, Sally K. Mason, is considering a similar ban, The
Register reported.
Education or Exploitation
State Sen. Thomas G. Courtney, a Democrat and chairman of the legislature's
joint Government Oversight Committee, scheduled the hearings for today and
Tuesday to help lawmakers consider what additional steps should be taken.
Those scheduled to testify before the panel include Matt Pfaltzgraf, a University
of Iowa senior. His recommendation for banning on-campus credit-card
marketing is backed by national student advocates, including the U.S. Public
Interest Research Group.
Mr. Pfaltzgraf, a 22-year-old majoring in finance and political science, said he
also would propose that the university create a credit-management service and
provide it with as large a budget as is given to existing student programs such as
legal services and health services.
The university, he said, also should tighten its policies on the disclosure of
student records to outside parties, including banks, so that students must "opt in"
for the release of their contact information rather than "opt out."
Mr. Pfaltzgraf said he holds three credit cards, but understands the risks and
rewards. He said he keeps low balances and pays them off, and expects to build
a strong credit rating that will help him buy a home some day. Many of his fellow
students, who may come from families that did not teach such practices, are
more vulnerable to marketing, he said.
"I don't think they're too dumb or anything," he said, "but it's the first time that
they've ever encountered these types of things. It's not like they've gone through
high school or elementary school learning about credit cards. A lot of students
don't even know how to balance their own checkbook."
Loan Debts, Credit-Card Debts
Statistics show such students are rare, Mr. Weil said. Student Monitor's most
recent survey, involving interviews in March of 1,200 full-time undergraduates at
four-year colleges, found that 83 percent believed they were "very" or
"somewhat" prepared for the responsibility of having a credit card.
The survey also found that 35 percent of undergraduates let a credit-card
balance carry from one month to the next, with an average balance of $559,
down 11 percent from the previous year.
And only 38 percent of American undergraduates have a credit card, down from
a high of 52 percent about seven years ago, as students rely increasingly on
checking accounts combined with debit cards, Mr. Weil said.
The survey also portrays on-campus marketing, which is drawing attention in the
Iowa cases, as a relatively minor factor. Forty-three percent of undergraduates
said they had applied "in person at bank" for their credit card, the leading
method, followed by "direct mail" at 20 percent, down from 25 percent the
previous year, the survey found.
American college students may be facing growing mountains of debt, but that's
largely because of the rising costs of college and declining amounts of
government aid, Mr. Weil said. Credit-card debt represents only about 1 percent
of the total, he said.
What Is to Be Done
Legislation proposed annually in Congress for the past several years, without
success, would enact several protections, including limiting credit lines to 20
percent of a student's annual income, if the student has a co-signer, or $500
without a co-signer.
Too many students graduate "without the knowledge or ability needed to pay off
their debt," said one of the measure's sponsors, Rep. Louise M. Slaughter, a
Democrat of New York.
In many instances, Mr. Manning said, the students don't even graduate, quitting
college[--]or worse[--]because of their debts. He cited the tragic case of Mitzi
Pool, a student at the University of Central Oklahoma who hanged herself by a
bedsheet in her dormitory room in 1997, in apparent distress over having
accumulated about $3,000 in credit-card debt.
Mr. Manning acknowledged that many students can handle credit cards
responsibly. The problem is that too many cannot, and the pressure they face
builds in college as they engage with classmates in "the intensifying pressures of
competitive consumption," without first learning the basics of budgeting and selfcontrol, he said.
Too many "corporatized" universities then step into that mix of student naïveté
and peer pressure with their profit-driven credit-card partnerships, he said. Any
educational campaigns about credit cards on campuses usually provide students
with just enough information to give banks a shield of legal-liability protection, but
not enough to give students a comprehensive understanding of the financial and
social realities of credit, he said.
At the Rochester Institute of Technology, Mr. Manning heads the Center for
Consumer Financial Services, which studies the effects of commercial banking
on American society "at the individual, household, community, and national
levels."
Still, those lessons take time to learn, and Mr. Manning does not think students
are prepared to make wise personal judgments about credit cards soon after they
enroll.
"Fewer people would get into trouble" if they received the level of financial
education available in the Rochester program, but that doesn't mean universities
should encourage banks to aggressively market credit cards to their freshmen,
he said.
State or Federal Action?
The hearings this week in Des Moines are important to resolving the situation in
Iowa, Mr. Manning said. But the problem is nationwide, and because many banks
are nationally chartered, advocates will make minimal progress without help from
Congress, he said.
"States have very limited ability to regulate these activities," Mr. Manning said.
On the federal level, however, proposed limits stand opposed by the banking
industry, which made more than $25-million in contributions to candidates in the
2006 Congressional elections, according to the Center for Responsive Politics.
"We have several concerns about the restrictions" contained in Ms. Slaughter's
legislation, on grounds that include costs and logistics, said John Hall, a
spokesman for the American Bankers Association.
Limits based on a student's annual income "may prove nearly impossible to
implement," Mr. Hall said, because one card issuer would not know how much
credit the student had obtained on his other cards. He said he could not
comment on the possibility of solving that problem through steps such as limiting
students to a single card or applying the income-based cap to each card.
Also, Mr. Hall said, income-based limits would unfairly restrict students with
legitimate needs such as emergency car repairs, airline tickets to go home, or the
purchase of textbooks.
The limits, he said, would be "incredibly constricting and patronizing to young
adults who use credit responsibly every day."