Stiffer rules on student credit

President Obama recently signed the Credit Cardholders' Bill of Rights Act of 2009, which includes two important provisions that regulate the marketing of credit cards to college students.

Marketing to college students is a critical element of the modern credit card industry's strategy of encouraging debt early on and keeping the debt pipeline flowing throughout a consumer's lifetime. A 2008 report by the U.S. Public Interest Research Group noted that "targeting of undergraduates and making exclusive deals with colleges represent a long-term industry strategy to become the first-in-the-wallet, top-of-the-wallet card for as many consumers as possible."

One provision of the new law, drafted by Rep. Patrick Murphy (D., Pa.), requires credit card companies that enter into so-called affinity agreements with colleges and universities to publicly disclose the terms.

Many students across the country are enticed to apply for credit cards that bear the name and logo of their institution. Such offers are the result of exclusive agreements between colleges and credit card companies, from which both sides profit handsomely.

Colleges receive hundreds of thousands to perhaps millions of dollars in annual revenue in exchange for the rights to market credit cards to their students. In exchange, credit card companies receive exclusive marketing rights, as well as regular lists of students' contact information, including campus mailing addresses, permanent/home addresses, phone numbers, and e-mail addresses.

Until the Murphy amendment was passed, these affinity agreements were shrouded in secrecy. Now, students, families, and others will be able to examine and evaluate the agreements, which the credit card companies must report to the federal government.

Another successful amendment to the legislation, sponsored by Sen. Bob Casey (D., Pa.), bans inducements to students in exchange for credit card applications. For years, we have heard stories of students applying for credit cards - effectively enrolling themselves in thousands of dollars in debt, exposing themselves to credit risk before their professional lives even begin, and signing over their personal information - in exchange for such tokens as blankets at college football games during the winter.

The U.S. PIRG report said "credit card companies and their subcontractors are taking advantage of students' chronic cash shortages to attract them to tables with offers of the instant gratification of free food, then getting them to sign up for the cards that, ironically, may contribute to later cash problems."

Student indebtedness has continued to rise over the past decade, according to the Project on Student Debt. The average student today owes roughly $20,000 before he attends his first job interview. The PIRG report noted that, on average, college freshmen are $1,300 in debt to a credit card company, while college seniors carry an average of more than $2,600 in credit card debt.

Exposing and regulating these ethically marginal business relationships between colleges and credit card companies is an important element in stemming the credit crisis.

Moreover, creating protections from excessive debt during the formative college years may help solve a related problem: Excessive debt is a significant deterrent to enrolling or remaining in college, research suggests. With college costs rising and incomes falling, what sense does it make to encourage debt on top of debt?

Over the course of two short generations, Americans have come to assume that borrowing is simply a fact of life, and that companies that purvey debt are there to help. Irrationally, we have grown to trust that the fine print is nothing to worry about, and that we will be able to borrow against future earnings to get what we want today.

The trouble is, once it gets started, the borrowing never stops. Is that the way we want to prepare our college students for their financial lives?

Adding some commonsense limits and transparency to credit card arrangements between banks and colleges, with the help of the Murphy and Casey amendments, was an important victory for consumers.