At the start of every school year, major banks offer students "free" credit cards. There are good reasons for banks to solicit students' business even though most students have neither steady jobs nor credit histories. First, students have a better record of paying their bills than the general public, because if they can't pay, usually their parents will. Second, students turn into loyal customers. Studies have shown that students keep their first credit card for an average of 15 years. That enables banks to sell them services over time, such as car loans, first mortgages, and (somewhat ironically) debt consolidation loans. Third and perhaps most importantly, students are ideal customers because they do not tend to pay off their credit balances each month. A 2009 study by Sallie Mae, the largest student loan provider, found that among undergraduates who have credit cards, the credit card balances of only 18 percent are paid off each month. The other 82 percent carry a balance and pay interest charges. Sallie Mae also found that the percentage of undergraduates with at least one credit card increased from 76 percent in 2004 to 84 percent in 2009. Furthermore, students with credit cards had an average of 4.6 cards and owed an average of $3,173 in 2009. Seniors owed the most, with average debt of $4,100. Nineteen percent of students with credit cards owed over $7,000 on those cards!

Concern over Growing Student Debt

Concern has been growing that students cannot handle the debt they are taking on. In addition to credit card debt, the average graduating senior in the class of 2009 had $24,000 in student educational loan debt and 10 percent had more than $40,000 of such debt. The average student loan debt among graduating seniors in 2009 was almost twice as large as the average in 1996. Many students fail to realize that when they apply for a car loan or a mortgage, the total ratio of debt to income is usually the most important factor determining whether they get the loan. Student educational loans are added to credit card debt, and that, in turn, is added to the requested loan amount to determine eligibility. When all the debt is summed up, many do not qualify for the loan they want. In many cases, people are forced to postpone marriage or the purchase of a house because of their outstanding student loans and credit card debt.

To understand how students get into this kind of situation, consider the following hypothetical case. Suppose a student has a balance of $2,000 on a credit card. She makes the minimum payment every month but does not make any other purchases. Assuming a typical rate of interest, it would take six and one half years to pay off the credit card debt, and the student would have incurred interest charges of $2,500. As one observer noted, students like this one "will still be paying for all that pizza they bought in college when they are 30 years old." A book published in 2000, Credit Card Nation: The Consequences of America's Addiction to Credit, was particularly critical of marketing credit cards to college students. The author, Robert Manning, identified a wide range of concerns, such as lowering of the age at which students can obtain credit cards, increasing credit limits on credit cards, students financing their education with credit card debt, and students using credit cards to conceal activities their parents might not approve of. Critics also point out that some of the advertising and marketing practices of the credit card companies are deceptive. In one case, for example, a credit card was touted as having no interest. That was true for the first month, but the annual percentage rate (APR) soared to 21 percent in the second month. Finally, many—including the students themselves—say that students do not receive sufficient education about how to manage credit card debt.

Supporters of credit card programs counter that most students do not "max out" their credit limits and that the three most common reasons for taking out a credit card are the establishment of a credit history, convenience, and emergency protection—all laudable goals.

The Credit Card Act of 2009, passed by Congress and signed by the President in 2009, includes a provision that is aimed at limiting the ability of credit card companies to market cards to students and other young adults. This provision, effective February 22, 2010, prohibits credit card companies from issuing credit cards to anyone under 21 unless that person can produce either (1) proof of a sufficiently high independent income to pay the credit card loans or (2) a willing co-signer who is over the age of 21. It remains to be seen whether this provision helps reverse the trend toward greater student credit card debt.

Affinity Credit Cards

The marketing of credit cards to students took a new twist in the 1990s. Banks began to compete fiercely to sign up students for their credit cards, and some banks entered into exclusive arrangements with universities for the right to issue an affinity card—a credit card that features the university's name and logo. The card issuer may be willing to support the university to the tune of several million dollars to gain the exclusive right to issue the affinity card and to keep other banks off campus.

The "Report to the Congress on College Credit Card Agreements," which was required by the Credit Card Act of 2009, revealed for the first time in October 2010 exactly how pervasive this practice had become. In 2009 alone, banks paid $83 million to U.S. colleges, universities, and affiliated organizations for the right to market their credit cards to students and alumni. Universities usually receive a half percent of the purchase value when the card is used. Often, they receive a fee for each new account, and sometimes they receive a small percentage of the loans outstanding. Every time a student uses the credit card, the university benefits. The total benefits to individual universities can be substantial. For example, in 2009 alone, the University of Notre Dame du Lac received $1,860,000, the University of Southern California received $1,502,850, and the University of Tennessee received $1,428,571 from credit card agreements. In previous years, some universities received even larger direct payments from credit card issuers seeking to do business with students and alumni. Georgetown University, for example, received $2 million from MBNA for a career counseling center; Michigan State received $5.5 million from MBNA for athletic and academic scholarship programs; and the University of Tennessee received $16 million from First USA primarily for athletics and scholarships.

Universities have been facing difficult financial times, and it is easy to understand why they enter into these arrangements. However, the price the university pays is that it becomes ensnared in the ethical issue of contributing to the rising level of student credit card debt. Moreover, universities with affinity credit cards cannot escape a conflict of interest: the higher student credit card debt climbs, the greater the revenues the university earns from the bank. As a result of these issues, some universities have increased the amount of information they provide to students about handling credit card debt, both through counseling and formal courses.

Certainly, learning to responsibly manage credit card purchases and any resulting debt is a necessary part of the passage to adulthood. We can applaud the fact that universities educate students about the dangers of excessive credit card debt. However, if universities make money on that debt, we must question whether they have less incentive to educate students about the associated problems.

DISCUSSION QUESTIONS

Should universities enter into agreements to offer affinity credit cards to students? 

Whether or not a university has an affinity credit card, does it have an obligation to educate students about credit card misuse and debt management? 

Does the existence of an affinity credit card create a conflict of interest for a university if and when it adopts an education program on credit card misuse and debt management?

To what extent are students themselves responsible for their predicament?