Fixing the College Credit-Card Mess

Here are five important measures that could help prevent college students from building up crippling credit-card debt

by Jessica Silver-Greenberg

Related Items

• Part 1: Majoring in Credit-Card Debt
• Part 2: Confessions of a Credit-Card Pusher
• Part 3: The Dirty Secret of Campus Credit Cards
• Credit Cards 101: Finding the Right Plastic
• Credit-Card Survival Guide
• Table: Credit-Card Contributions

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This story is the fourth in a series examining the increasing use of credit cards by college students.

Every year for the past six years, Representative Louise Slaughter (D-N.Y.) has introduced a bill designed to prevent students from taking on unmanageable amounts of credit. For six years, she has tried to alert Congress to the dangers of college student debt. And for six years, she has failed.

But this year may be different. With a Democrat majority in Congress and a growing number of college kids piling up debt that could haunt them long after college, credit-card companies are coming under increasing scrutiny, and Slaughter thinks she just might have the critical mass to succeed this time. "This Congress finally cares more about the interests of students than the interests of credit-card companies," says Slaughter.

House Bill Would Restrict Credit

Her bill, the Student Credit Card Protection Act, first introduced in October, 1999, with co-sponsor Representative John Duncan (R-Tenn.) and reintroduced this August, would limit the amount of credit extended to students to 20% of their total income if they have a co-signer, like a parent, or $500 without a co-signer. It would also require creditors to rigorously review a student's credit history and proof of income before issuing a card. A companion bill, sponsored by Senator Herb Kohl (D-Wis.) and Senator Richard Durbin (D-Ill.) is pending in the Senate.

If they pass this year, these bills would mark a significant step forward in the battle against dangerous credit-card practices and would work to reform an industry that critics argue is in need of supervision. "No industry in America is more deserving of oversight by Congress," says Travis Plunkett, legislative director for the Consumer Federation of America.

Slaughter's move is just one example of how Congress is turning up the heat on credit-card companies. Senator Christopher Dodd (D-Conn.) held hearings before the Senate Committee on Banking, Housing & Urban Affairs, followed by an extensive examination of credit-card rates and fees, lead by Senator Carl Levin (D-Mich.). Any federal regulation setting caps on interest rates, late payments, or access to college students would be a marked change, since there is virtually no regulation now. "Federal regulators have been asleep at the wheel," says Plunkett.

Of course, even now, this may be nothing more than political sound and fury, signifying nothing. Slaughter and the Democrats may falter in their reform efforts, push for other priorities in Congress, or pass symbolic legislation with no real substance to it. They may settle for congressional hearings that win them positive press and then do nothing, while accepting the plentiful political contributions from card issuers. The top three campaign contributors from the credit-card industry—Citigroup (C), JPMorgan Chase (JPM), and Bank of America (BAC)—gave more than $2 million each in the 2006 election cycle, with roughly equal amounts going to Democrats and Republicans.

Legislating the No-Fly Zone

Credit-card companies, according to consumer advocates, have operated since the early 1980s in a legislative no-fly zone, created after a series of Supreme Court decisions divested states of their ability to protect consumers by setting caps on interest rates and fees. Now credit-card companies can export high interest rates from the states where they are located into the states where consumers live, even if those states have restrictions on interest rates or late fees.

That's why if you look on the back of your credit-card statement, you will see that the return address is most likely South Dakota or Delaware—states considered safe harbors for credit-card companies because they have no cap on interest rates or late payments. "This used to been an arena where the states took a lead, and their ability to do that has been wiped out. Congress has not stepped in to fill that void," explains Tamara Draut, director of the Economic Opportunity Program at Demos, a public policy think tank based in New York.