Credit Limit

May 21, 2009

WASHINGTON -- It’s the end of free pizza as we know it, and consumer advocates feel fine.

The U.S. House passed a bill Wednesday that will place limits on credit card companies' marketing to students, preventing them from handing out free food and T-shirts on college campuses, and requiring many students to have a co-signer before they receive a card.

The Credit Card Act of 2009, which passed the Senate Tuesday and is now headed to President Obama, who is expected to sign it, was heralded by those who say students have been exploited by credit card companies. But some fear that students, in having their access to credit cards limited, will be denied a chance to build up credit in college and barred from accessing a viable -- albeit vexed -- tool for financing their educations.

Under the legislation, credit card companies would be prohibited from issuing cards to people under the age of 21, unless they either have a co-signer or can demonstrate an ability to repay the debts on their own. Karen Gross, president of Southern Vermont College, called the legislation “a remarkable first step -- not a last step.” Gross, a law professor at New York Law School and founder of the Coalition for Consumer Bankruptcy Debtor Education, says she’s worried that other, increasingly predatory options -- think payday loans -- will become the only viable alternatives for students of modest means who can’t access credit cards under the new law.

“It’s a good idea not to take advantage of students. It’s a good idea not to offer credit cards on campuses where students end up getting them without knowing all the provisions that are there,” said Gross, whose research concerns consumer financial markets and asset building in low income communities. “But if we’re going to restrict student access to credit, you cut off an avenue for students to pay for their education. What replaces it?”

The bill had a strong base of support among consumer and student advocacy organizations. Edmund Mierzwinski, consumer advocate at the U.S. Public Interest Research Group (PIRG), said after the bill’s House passage Wednesday that he expects the limits on aggressive marketing tactics will ultimately reduce students’ debt. As for limiting student access to credit, Mierzwinski said students who can afford to pay off credit cards won’t be affected at all.

“Nobody’s intent was to prevent students from getting cards,” he said. “I think the banks are using [that argument] as their whipping boy.”

PIRG’s own research suggests credit card debt has become a problem for college students, and it gets worse as they progress. College seniors who were responsible for paying their own credit card bills reported debts of $2,623 in 2007, compared with $1,301 for freshmen, according to PIRG’s “Campus Credit Card Trap Report.”

Industry Lobbied Against Bill

Not surprisingly, credit card reform drew ready opposition from the banking industry. Lobbyists for the industry criticized aspects of the legislation that would limit circumstances when they could penalize customers or change rates, saying those restrictions would result in higher fees for all customers. Peter Garuccio, a spokesman for the American Bankers Association, said the restrictions placed on student access to credit cards were misguided as well.

“We recognize that credit cards for young people are often the first foray into the broader world of financial services,” he said, “and issuers want it to be a positive one and realize that it can be the first step or the first building block toward establishing a credit history, so down the road the [students have the] ability to purchase a car or a home.… These are important things.”

Talk of credit card reform has been building since Democrats took control of Congress, but credit card companies didn’t go down without a fight. The five major credit card companies sought to expand their influence in Washington in the first quarter of 2009, increasing their lobbying expenses by 40 percent over the first quarter of 2008, USA Today reported.

Colleges' Ties to Industry Scrutinized

Colleges and universities have taken their own share of criticism for getting overly cozy with credit card companies, offering the industry entrée to students and alumni in exchange for sometimes lucrative deals. Michigan State University, for instance, had an $8.4 million contract with Bank of America, granting it access to students’ names and addresses and allowing use of the university’s logo, The New York Times reported last December.

The federal legislation passed this week won’t end colleges’ relationships with credit card companies, but it will make the agreements more transparent. Creditors will be required, for instance, to issue annual reports regarding their business relationships with colleges, alumni organizations or affiliated foundations.

“In the limited experience we’ve had, definitely shining lights on these agreements tends toward improving the situation,” said Pedro de la Torre, advocacy senior associate for Campus Progress.” “Hopefully just knowing that people are watching and having their eye on this will at least make the contracts more student-friendly.”

It’s unfortunate, however, that the contracts exist at all, de la Torre said.

“It’s disappointing that a college would allow some of these marketing contracts to take place, especially ones that allow selling of student contact information,” he said. “When students see a card with the university’s logo on it, even included in the freshman orientation materials, they assume this is a good deal, this is OK.… But, like we see with the student loan scandals, sometimes that trust is misplaced.”

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