Selling Students into Credit-Card Debt

Lawmakers target credit-card issuers that appeal to college students with gifts and prizes, but universities' lucrative affinity deals evade regulation

by Jessica Silver-Greenberg

Citibank (C) pitched an offer at Ohio State University that few college students would refuse: free food. The bank plastered the Columbus campus with advertisements for free sandwiches at a local haunt, Potbelly. The only catch? Students had to submit a credit-card application before any free food crossed the counter.

The food-for-credit application scheme caught the attention of Ohio's attorney general, Marc Dann, who sued Citibank on Sept. 19, alleging that the campus advertisements violated the state's consumer-protection laws. Dann has partnered with students and professors at Ohio State's Moritz College of Law to prosecute the suit, which accuses Citibank of using bait-and-switch advertising, failing to clearly state conditions of the offer, and tempting students with a prize without disclosing all the conditions. The suit seeks more accountability in credit-card marketing practices. "Citibank is starting out the marketing deceptively and banking on the fact that these kids won't read the fine print," Dann says.

Citibank maintains that it never condoned the advertising, and is pursuing its own investigation of the ad. "The practices alleged in the complaint are not approved Citibank practices and if true, they were not condoned nor authorized by Citibank," says company spokesman Sam Wang. Another company, Pennsylvania-based credit card marketer Campus Dimensions, is also being sued by Dann for a similar scheme at a second restaurant, La Bamba. An attorney for Campus Dimensions declined to comment on the suit.

Affinity Deals Escape Scrutiny

As concern over student debt levels rises, lawmakers and campuses nationwide have turned their attention to credit-card issuers and marketing practices aimed at students. California, Oklahoma, and Texas recently passed laws restricting credit-card marketing on public campuses, joining 15 other states that already had such restrictions in place. In California, credit-card marketers can't lure students with free gifts; in Oklahoma, colleges can no longer sell student information for credit-card marketing purposes; and in Texas, on-campus credit-card marketing was curtailed, permitting marketing only on limited days and in certain locations.

However, beyond the recent legislation, another type of state-sanctioned credit-card marketing escapes serious scrutiny: affinity card contracts and marketing. Virtually every major university boasts a multimillion-dollar affinity relationship with a credit-card company. Under these deals, the university can receive $10 million or more in exchange for offering credit-card companies exclusive access to students, alumni, and professors at school athletic events. In some cases, the deals require schools to provide student e-mail addresses and phone numbers to the card-issuing bank. As state funding shrinks for public universities, such deals grow.

These deals provide a steady income stream for the university, but at what cost to students? Consumer advocates argue that these contracts allow schools to profit from student debt. In many cases, universities actually get a cut of overall charges on the school-backed card, raising questions about conflicts and whether schools negotiate the best deals for student and alumni.

What's more, typically the worse a card's financial terms are for students and alumni, the bigger the profit for the school. These deals potentially weaken schools' ability to protect students from aggressive marketing tactics, high interest rates, onerous debt loads, and deceptive billing practices. "You have to wonder whether the university is doing everything they can to reduce student debt, when there is a clear financial conflict of interest," says Travis Plunkett, legislative director for the Consumer Federation of America (consumerfed.org). Diane Wagner, a Bank of America (BAC) spokeswoman, says that 98% of affinity card holders are alumni and other nonstudents. "There are real benefits to the cardholder including reward points and cash-back bonuses," Wagner says. "Alumni are showing pride in their schools by becoming cardholders." She declined to comment on whether the cards pose a conflict of interest.