Question: When is a loan considered income? Answer: When a bank wants a way to justify slipping a credit card into the wallet of a college student.
That's the contention of Jim Hawkins of the University of Houston Law Center, an assistant professor and author of a soon-to-be-published research study. The report, based on surveys of 500 students at the University of Houston and Baylor University in Waco, Texas, concludes that banks are conjuring a variety of tactics to evade tough new federal restrictions on the marketing of credit cards to college students.
Techniques the banking industry developed in response to the Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009, according to Hawkins and his study, include:
- New initiatives to mail credit card offers to students.
- New programs to offer promotional and "tangible" gifts to prospective collegiate credit card customers.
- Perhaps most provocatively, policies that allow college students, including those younger than 21, to include loans as a component of the income they cite to qualify for credit cards.
In the end, Hawkins said, not much has changed when it comes to the aggressive on-campus or near-campus marketing of credit cards. Countless college students, many of them financially or chronologically unprepared for the burden of credit card debt, are still being bombarded by offers.
"The CARD Act doesn't seem to be working as its proponents had hoped," Hawkins said. "Students under 21 years old are still reporting that they're getting credit card offers in the mail and that they see credit card companies on campus and giving out tangible items at pretty high frequency."
Intended to cut student marketing
The findings could disappoint those who hoped that the CARD Act, whose major provisions took effect in February 2010, would achieve one of its signal objectives -- substantially diminishing student indebtedness, largely by curtailing the marketing of credit cards on or near college and university campuses.
The importance of such action was underlined earlier in April by the release of another study. This one, conducted by researchers on five university campuses, found a woeful lack of financial literacy among college students, particularly when it comes to credit cards.
That report noted that 70 percent of American college students have credit cards, but five of every six of them do not know their cards' interest rates and large majorities could not cite their cards' late payment charges or over-limit fees. Partly as a consequence, more than 90 percent of college students who hold credit cards are carrying monthly card-related debt. The average credit card debt for a college senior, a survey by Sallie Mae found, was $4,100 in 2009.
"The big risk with credit cards is that they are not tied to any specific collateral," Hawkins said.
"It used to be you would buy a fridge and the amount of credit would be tied to the fridge," he said. "But, with credit cards, the only tie is with keeping a good credit report. You can be a freshman starting off with a $500 credit card limit and in a few years that could become $30,000 without anyone ever asking about your new financial resources."
Card industry objects
Credit card industry representatives, however, insist that Hawkins' report is much ado about virtually nothing.
"There was nothing in the CARD Act that was intended to prevent students from getting credit cards," said Nessa Feddis, vice president, senior counsel and a retail banking expert at the American Bankers Association, which represents credit card issuers. "I find [Hawkins'] reports have been a bit misleading. They suggest violations of the act where no violations exist."
Moreover, she urged students and their parents to keep the big picture in mind.
"Credit cards are useful to everyone, including students, especially in times of emergency," Feddis said. "They also help young people build up a credit history."
Hawkins acknowledged that his findings do not point to any illegal activity. "But maybe," he said, "it does suggest that we need to work a little harder on the act. Maybe it needs to take a more direct approach to credit cards and college students."
The study found that:
- Fifty-eight percent of responding students under 21 years old said they received credit card offers, including so-called "prescreened" offers, in the mail during the past year.
The CARD Act made it more difficult for issuers to obtain student addresses and otherwise sought to cut down on "prescreened" and thus quasi-preapproved offers by prohibiting Experian, Equifax, TransUnion and other credit reporting agencies from providing card issuers with addresses and credit reports of under-21 students unless the consumers specifically requested that action.
However, many students still are receiving prescreened offers. One reason: The CARD Act does not prohibit colleges and universities from sharing student mailing addresses with credit card companies, and -- under marketing agreements between card issuers and universities -- many schools do so.
Feddis, of the American Bankers Association, noted that issuers have many other sources of address information, including magazine subscription lists. Moreover, she said, "It was never anticipated that, under the CARD Act, students would be prohibited from getting credit card offers in the mail."
- Four of every 10 responding students reported seeing representatives of credit card issuers hand out promotional gifts to students, a practice authors of the act had sought to curtail.
The CARD Act and related regulations imposed by the Federal Reserve prohibit card issuers from marketing activities on campus or within 1,000 feet of a college campus or at school-related sporting events, concerts, etc. Those regulations also forbid the distribution of "tangible" items such as gift cards and T-shirts. Hawkins said he did not ask for details of what the responding students saw, but he believes that many representatives of credit card issuers -- while adhering to the letter of the law -- are not in sync with its spirit.
"It could be that they're setting up 1,001 feet from the edge of campuses," he said.
Feddis was skeptical of those reports from students. "I really question that, because the credit card companies take those rules very seriously," she said.
- Twenty-seven percent of responding students under the age of 21 said they were allowed to list their loans as part of the "income" they cited to qualify for their credit cards.
The CARD Act went to great lengths to require students to prove they had sufficient income to repay their credit card debts or had a co-signer for those cards. According to the Fed, those sources of income could include salary, wages, tips, bonuses and commissions from full- or part-time jobs and self-employment as well as income from interest, dividends, child support, alimony payments, retirement benefits and public assistance.
There is no mention of loans. On the other hand, there is no language that explicitly prohibits the inclusion of loans, an apparent loophole that card issuers could be exploiting.
"It's legal," Hawkins said, "but it does seem very strange. If our goal is to prevent financial distress, it seems strange to let people qualify for one form of credit with money from another form of credit."
Feddis said it's not a loophole at all. If loans are a minor component of a student's income or ability to cover credit card debts, there simply is no problem, she said.
"This is not about 'earned' income," she said. "It's about having sufficient income or assets. If I have $1 million in the bank and no salary, I still qualify for a credit card. You just have to have an ability to repay the debt, and [student] loans are meant to cover all sorts of expenses, including those that are convenient to charge to credit cards."
- Though the CARD Act compelled credit card issuers to disclose their once-secret marketing agreements with colleges, universities, alumni groups and the like, most of those so-called "affinity" agreements continue to thrive, even in the sunshine. Sixty-four percent of the 300 agreements Hawkins studies did not change a bit between 2009 and 2010.
Hawkins' study did find, however, that the number of students who received mailed credit card offers decreased from 76 percent in 2010 to the 58 percent reported last year.
What does he make of that?
"It's too soon to tell, but it could be that some of the credit card companies' address lists are aging out of the under-21 group and they're having trouble replacing that information," Hawkins said.
Meanwhile, Feddis, representing the banking industry, emphasized that credit cards and college students are not necessarily a formula for financial disaster.
She said that credit card companies usually start off college students with modest credit limits of $500 to $1,000, and, as a whole, students have a good record of handling their credit cards responsibly.
"There never was an intent in the CARD Act to discourage or prohibit students from getting credit cards," she said.