The College Credit-Card Hustle

How universities and alumni associations profit by marketing undergrads to financial giants—like Bank of America

by Jessica Silver-Greenberg and Ben Elgin

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Illustrations by J. Alex Stamos

Universities and their alumni associations have discovered an unlikely and disturbing source of revenue: Increasingly, they are selling students' personal information to big credit-card companies eager for young customers.

Using state public disclosure laws, BusinessWeek has obtained more than two dozen confidential contracts between major schools and card-issuing banks keen to sign up undergraduates with mounting expenses for tuition, books, and travel. In some instances, universities and alumni groups receive larger payments from the banks if students use their school-branded cards more frequently.

The growing financial alliance between schools and banks raises questions about whether universities are encouraging students to incur additional high-interest debt at a time when many

young people graduate from college owing tens of thousands of dollars. Most undergraduates lack substantial income of their own and are especially vulnerable to late fees and other penalties if they fall behind on monthly payments.

BusinessWeek's investigation parallels a separate probe by New York Attorney General Andrew Cuomo. He is looking into a range of relationships between schools and financial institutions. "It seems that the schools are simply selecting the university credit card based on who pays the school the most, and that may not be best for students, especially in these hard economic times," says Benjamin Lawsky, a Cuomo aide. Last year, Cuomo cracked down on ties between colleges and private tuition lenders, some of whom were paying schools to promote them to financially strapped students.

Some of the country's best-known and largest schools have multimillion-dollar credit-card deals, including the Universities of Michigan, Minnesota, and South Florida. Private schools also have these typically secret deals, but information about public institutions is more readily obtainable under disclosure laws.

Alumni groups often take the lead in arranging for so-called affinity credit cards, many of them decorated with school mascots and logos. Schools usually approve the contracts and provide access to student information such as e-mail addresses and phone numbers. Some schools also allow on-campus hawking of credit cards through T-shirt giveaways, phone campaigns, and in-store promotions.

Universities rarely negotiate favorable terms for their students, according to people familiar with the practice. On the contrary, some schools and booster groups entice undergraduates to sign up for cards with low initial interest rates that are soon replaced by steep double-digit rates.

SNARING CUSTOMERS

The University of Iowa's alumni association sent a credit-card mailer to students in May 2007, announcing in large bold letters "outstanding financial benefits for students," including a 4.9% interest rate. "Don't miss this unique opportunity to show your University of Iowa pride, while you enjoy truly outstanding credit card benefits and services," urged a marketing letter signed by Vince Nelson, alumni president. Iowa students who scrutinized the accompanying paperwork found that the 4.9% rate lasted only six months before leaping to 18.24%, a common technique in the credit-card industry.

In exchange for helping snare customers from Iowa's 29,000-person student body, card issuer MBNA (now owned by Bank of America (BAC)) agreed to pay the school's alumni group about $1 million a year, some one-fourth of the organization's operating budget. This kind of dependence on credit-card revenue isn't unusual. The University of Delaware's alumni group receives about $300,000 a year--more than 90% of its revenues--for delivering student contact information to BofA.