In Depth July 17, 2008, 5:00PM EST

The College Credit-Card Hustle

(page 4 of 4)

CHANGE OF HEART

Schools or alumni groups inclined to curtail their relationships with credit-card issuers may pay a price. That's what happened at Washington State University last year. The alumni group had a contract with MBNA from 1997 to 2007 under which it provided the card company with student contact data. The bank was allowed to conduct at least four direct mailings a year, three telemarketing campaigns, and five on-campus marketing events. On top of payments for alumni accounts, the contract promised the group $3 a year for each student account and 0.4% of all sales charged to student cards. The association stood to earn annual bonuses of $50,000 to $100,000, depending on the number of new accounts opened and the average outstanding balance held on the high-interest cards: The more debt, the more the alumni group stood to gain.

All told, the contract guaranteed the Washington State Alumni Assn. $5 million over 10 years, or $500,000 per year. That's no small amount for a nonprofit whose 2006 revenues totaled $2.4 million.

In 2006, however, state legislators in Washington began grumbling about credit-card marketing to college students. "We realized that this thing was littered with potential issues," says Jud Preece, the alumni association's marketing director. "We were being compensated for student accounts. It could be damaging to the university as a whole."

When it came time to discuss renewing the deal, the group told MBNA's owner, BofA, to remove students from the contract and stopped providing any information on undergrads. Credit-card marketing on campus ended, and the alumni association stopped receiving compensation for student accounts. A new five-year contract assures Washington State alumni only $1.6 million, or $320,000 per year--a 36% cut.

As with all specific contracts, BofA declined to discuss its relationship with Washington State. But two former bank executives say that the contracts become much less valuable without undergraduates. "Banks want the students," says Kerry Policy, who worked on college deals as an assistant vice-president at MBNA from 1998 to 2005. "People usually hold on to their first credit card for a long time."

Links

The problem of student indebtedness is cropping up elsewhere around the world, and a credit-card backlash could be building in the U.S. Congress.

THINGS ARE TOUGH ALL OVER

American college students aren't alone in facing mounting financial obligations. The Star of Toronto reported in June that Canadian university students are borrowing more to make ends meet as tuition has climbed sharply. Students in tiny New Zealand, meanwhile, took to the streets this month in the capital city of Auckland to protest rising debt levels. The New Zealand Herald noted that protesters demanded that the government enact a "living stipend" that would ease students' financial pain.

DEBT, DEBT EVERYWHERE...

Beyond school-sponsored credit cards, growing student indebtedness in general has become a source of acute concern as tuition and other campus costs balloon. A report released in May by the liberal research group Demos pointed out that the average overall debt of recent U.S. college graduates (ages 25 to 34) has doubled since 1989, to $20,000. This is exacerbated in many cases by increasing rent levels. Today 43% of young workers spend more than one-third of their income on rent alone, up from 18% in 1970, Demos found.

...AND ITS BRIGHT SIDE

But there's another perspective on rising student debt. An article in June on Economist.com argued that students and their parents benefit from having expanded access to credit. Undergraduates gain freedom to spend on necessities and emergencies, while Mom and Dad get fewer demands for handouts, the British magazine's Web site asserted.

RULES, REGS, AND RIGHTS

Back in the U.S., Democrats in Congress say they are serious about reining in a wide range of controversial credit industry practices that have helped push many free-spending consumers into bankruptcy court. Representative Carolyn B. Maloney (D-N.Y.) introduced a cardholders' Bill of Rights, available on her office's Web site (maloney.house.gov). The bill would give consumers 45 days' notice before an increase in interest rates triggered by a late payment. It also would stop banks from increasing their rates if a customer fails to pay another card issuer on time.

Silver-Greenberg is a reporter for BusinessWeek.com. Elgin is a correspondent in BusinessWeek's Silicon Valley bureau .

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