Congressional testimony: Student credit card issuers under investigation

Credit card issuers' marketing practices on college campuses got a raking-over from a congressional subcommittee Thursday, and one witness said it's about to get worse.

Benjamin Lawsky, deputy counselor and special assistant to New York State Attorney General Andrew Cuomo, revealed during testimony that his department is investigating the agreements between card issuers and New York colleges and universities.

"When the provisions in these agreements become public relatively soon, many people will be shocked," Lawsky told the House Subcommittee on Financial Institutions and Consumer Credit.

The schools kept some of the arrangements secret, he said, and they had to be pried loose by subpoena.

New York probe
While he did not go into the shocking specifics, he described generally the practices that the department found in investigating New York higher-ed institutions:

• Marketing agreements in which colleges were paid to turn over personal information about students, such as e-mail addresses, campus addresses, home addresses and phone numbers, and which gave the right to the card company to send marketing material multiple times each year.
• "Extremely aggressive" on-campus marketing practices "that often involve using students to get students to sign up, using peer pressure..."
• Affinity arrangements in which colleges get paid to allow the school to issue co-branded credit cards. "It's the Harvard card or the Yale card or the Georgetown card" that in essence say to students, "This is our preferred lender, this is our preferred credit card. Students trust their alma maters."

The agreements turned up, he said, during an earlier investigation by the attorney general's office into how some of the same schools bestowed, for substantial sums, "preferred lender" status on certain student lenders. 

Lawsky's revelations came during a hearing titled, "Problem Credit Card Practices Affecting Students: The Need for Legislative Action." As you can tell from the title, the hearing did not focus on the positive side of student credit, such as its use in building new credit and tiding students over during emergencies. The subcommittee is chaired by Rep. Carolyn Maloney, a New York Democrat who in February 2008 introduced the "Credit Cardholder's Bill of Rights."

Too much temptation
The legislative panel heard from consumer and financial literacy advocates that student card marketing practices provided too much temptation to students who are too ill-equipped to resist it.

"Our research has documented that students are targeted, indeed, bombarded by credit card company solicitations -- in the mail, on the phone and while they are walking across campus," said Christine Lindstrom, director of the Higher Education Debt Project for the consumer advocate group U.S. Public Interest Research Group. "On average, we found students got five solicitations a month from credit card lenders" who used free gifts as inducements to fill out applications. The gifts included pizza, candy, T-shirts, beach chairs and even iPods, she said.

Brett Thurman, a student at the University of Illinois at Chicago and president of its undergraduate student government, said that on-campus come-ons are barred at his school, so instead, a local sub shop just off campus handed out fliers offering a free six-inch sub.

Upon arrival, "the student is told that all he or she needs to do is fill out this form for a Discover card and they can get their free sub sandwich."

Erica L. Williams, who represented Campus Progress Action, an arm of the Center for American Progress Action Fund, a progressive think-tank, said the problem of student credit cards goes deeper than students just being unable to resist free food.  "To be clear, this accumulated credit card debt is not always the result of irresponsible spending and late-night pizza runs -- it is also the result of academic fees and textbooks," she said.

Defending credit cards
The outnumbered defender of the card industry was Kenneth J. Clayton, senior vice president and general counsel of the American Bankers Association Card Policy Council, the group within the ABA that deals with credit card issues.

He emphasized that students are a diverse group, deserving of credit, that shouldn't be treated differently.

Students "have shown that they can use credit more responsibly than the general population," he said. "Recent studies have found that student accounts generally have lower balances and lower credit limits, and that students use them less than the general population. And although 70 percent of  undergraduates and post-graduates have outstanding debt, the bulk of this debt is from student loans."

He cited 2008 Student Monitor statistics, derived from face-to-face interviews with a representative sample of students:

• 41 percent of college students have a card.
• Of the students with cards, about 65 percent pay their bills in full every month, which is higher than the general adult population.
• Among the 35 percent who do not pay their balances in full every month, the average balance is $452.

Other studies have found student credit card debt to be far higher.  

In reply to whether the card issuers' practices were aggressive, the ABA's Clayton said, "Understand we're in a marketing society and there will be aggressive marketing." The card issuers do substantial financial literacy work, he added, and universities themselves have the power to regulate how cards are offered on campus.

You can read the full, written testimony of all six witnesses or watch an archived video of the hearing.

See related: Top 10 ways students ruin their credit, Survey: Grad students' credit card debt averages $8,216