In only her second month of college, Sadie Hayes walked by a credit card display set up on campus. She liked the funny slogan on the free T-shirt she'd receive for signing up ("I will never again sign up for an 8 a.m. class"), and within a week she had received her first credit card in the mail.
Fast forward 15 years, and Hayes is 33, working to pay off nearly $25,000 of credit card debt from her first card.
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"If I calculated how much that T-shirt actually has cost me," Hayes told LearnVest, "I would probably die!"
Despite new regulations, predatory debit and credit card marketing to college students is still a major issue. Almost 900 colleges have lucrative debit and credit card partnerships with financial firms, according to new findings by the United States Public Interest Research Group, enabling banks to target and profit from over 9 million students across the nation.
Does Credit Card Marketing Even Matter?
Well, the marketing works: Studies have shown that, after students are repeatedly exposed to marketing by a certain bank or financial institution over time, a whopping 70%-80% will end up opening debit or credit cards with that company.
What's more, most of those students don't know how to manage the debt: 90% of students polled in one Credit Sesame survey carried a credit card balance month to month, yet under 15% knew their card's interest rate, and over 75% had "no idea" about late payment charges on their cards.
Though you might have sworn your friends to secrecy about that frat party freshman year, when it comes to credit card debt, what happens in college does not stay in college. Credit mistakes can haunt students for years to come, impacting their ability to get loans and reasonable interest rates.
According to a nationwide survey conducted by LearnVest and Chase Card Services, a division of JPMC, 35% of women between the ages of 25-32 say that credit card debt keeps them from reaching their financial goals. How many of them knew what they were getting into when they opened their first cards?
So, what is being done, or should be done?
New Rules With the Credit CARD Act
A new law called the Credit CARD Act protects consumers against predatory tactics from financial institutions. Among the many policy changes was a clause dedicated to limiting credit access for younger consumers.
Under the CARD Act, those under 21 can get a credit card only if they:
1. Have an adult co-signer on the account
2. Provide proof of sufficient income to show they'll be able to repay the debt
Another regulation requires banks and financial institutions to stay at least 1,000 feet, about three football fields, away from campuses if they're offering free gifts, perks or food with signup for a credit card.
(Though companies can get away with promotional gifts if they hand them out to everyone, whether or not the students end up opening a card; they can also give gifts for opening a non-credit account, like a checking account, and then later encourage you to get a credit card with them.)
What Do These Regulations Mean for the Economy as a Whole?
One analyst estimates that credit card and other reforms will end up costing the 20 largest banks $12.5 billion in lost revenue in 2012. These decreased profits come at a time when banks are worse off because they are also facing difficulty making loans, another traditional source of income.
From the banks' perspective, this creates a profit-and-loss cycle, in which one source of revenue dries up, so banks get more clever about creating new streams. As a result of this cat-and-mouse game, banks have now found a new, legal loophole to get their fix of revenue from college students.
A New Tactic to Target College Students
When schools are in need of extra revenue to balance their budgets, they often strike deals with financial institutions to turn school ID cards into debit cards. The student IDs are often branded with the logo of a bank or company, making it appear as though the school is endorsing the product.
While debit cards may seem harmless in comparison to the serious debt that students can rack up on credit cards, they have their own hidden costs.
Many universities have begun handing over control of financial aid disbursement to their partnered banks and lending institutions. These partnerships give banks an unrivaled opportunity to market the rest of their financial products, some with hefty hidden fees, to college students. In many cases, university IDs double as campus debit cards; having the bank's logo next to the university's insignia can give the impression that the school endorses the bank and its products.
What's more, some schools have handed off the admin task of disbursing student aid money to the banks. So, if a bank handles giving you the scholarship money you've earned, that bank has exclusive access to market to you.
The New York Times reports that Higher One, the leading financial service company on college campuses, levies debit card overdraft fees of $29 for the first offense, and $38 for every other one. Higher One charges an additional 50 cents every time you purchase something using a debit card, plus a $2.50 charge on withdrawing money from an out-of-network ATM. So, supposing a weekly cash withdrawal and a couple charges a day, students could lose around $10 from their financial aid balances every week. That can really add up.
In some cases, students may even be charged ATM fees to access their student aid grants. It’s especially disturbing that these fees are cutting into financial aid, meant to subsidize education for deserving students, not the debit card industry.
What’s the Solution?
Despite all of the negatives, credit card company presence on college campuses is still a nuanced situation. Even Sadie, who had such a bad experience with her first card, does not believe card companies should be totally prevented from marketing to college students.
“I don't think that they should be banned altogether,” Hayes says, “because, unfortunately, young people need to have credit when they exit college in case they want to get an apartment, a car, even a cell phone in their own name. Everything in our society these days is based on credit scores.” (Here's why your credit is so important.)
While there is no easy fix, educating young people about credit cards and debt is more important that ever. Students need to have a full understanding of the risks and benefits of credit to set themselves up for bright financial futures.
A great place to start learning about debt is Debt 101 in the Knowledge Center, where you'll find helpful tips on managing credit and get answers to the questions on your mind. And, if you're in debt and looking to get out, sign up for our free Get Out of Debt Bootcamp.