The Lure of Easy Credit Leaves More Students Struggling With Debt

Consumer advocates blame lenders, Congress, and some colleges

Debbie Alford received her diploma from the University of Central Oklahoma last month, but the sheet of paper did not reflect the hardest lessons she learned in

college. Those came from a handful of plastic.

Having obtained nearly a dozen credit cards during her first year in college, Ms. Alford at first charged only “necessities,” including books and tuition. She paid off her balance after her financial-aid check arrived each semester. But her trouble began when she started using credit cards to cover emergency expenses, like car repairs. Then she started charging pizzas and clothing. By her 23rd birthday, Ms. Alford had nearly $15,000 in credit-card debt.

Her part-time job as a waitress paid only $250 per week, so she increased her hours to make payments. Finally, during her junior year, Ms. Alford filed for bankruptcy.

“My debt was a huge cloud hanging over me,” she says. “I felt ashamed about having put myself in that position, but I should never have been able to get all those cards at such a young age. When you’re 18, you think you know what you’re doing with finances, but you really don’t.”

Ms. Alford, and thousands of students like her, are facing financial hardships just as Congress prepares to pass a bill that will limit options for students who borrow too much. Backed by credit-card companies, and supported by President Bush, the Bankruptcy Reform Act would make it more difficult to declare personal bankruptcy. Critics of the bill, who have tried unsuccessfully to curtail the marketing of credit cards to college students, say the same lenders who are eagerly extending credit to college students are making it harder for them to get out of debt. Credit-card issuers contend that students should be treated like adults, and that managing debt is a matter of personal responsibility.

Ms. Alford had seen the risks of credit cards. At Central Oklahoma, she was an acquaintance and dorm mate of Mitzi Pool, who had racked up about $3,000 in credit-card debt. After losing her job in the fall of 1997, she hung herself by a bedsheet in her room. Ms. Alford found her and tried to revive her. Ms. Pool’s checkbook and credit-card bills were spread over the bed.

The suicide caught the attention of legislators and consumer groups that for years have charged that lenders -- often in conjunction with colleges -- make it too easy for students to fill their wallets with credit cards. Meanwhile, largely because of credit-card use and higher student-loan balances, students are graduating from college with nearly twice as much debt as a decade ago -- and consumers under 25 are filing for bankruptcy in record numbers.

Two decades ago, an 18-year-old could buy a bottle of Budweiser on his own but would have needed Mom or Dad to get a Visa card. Lenders required parents to cosign credit-card contracts for applicants under 21. With little or no income, college students did not seem like good risks.

Once banks had saturated the market of working Americans by the late 1980’s, however, they turned to the low end of the income bracket for new customers. By the early 90’s, virtually all of the major banks had dropped the cosigner requirement. Young applicants could obtain credit cards on their own upon turning 18 -- the average age of a college freshman.

During the past decade, students have generated plenty of business for credit-card companies -- and plenty of debt for themselves. According to a 2000 survey by Nellie Mae, a major student-loan provider, undergraduates carried an average credit-card balance of $2,748, up from $1,879 in 1998 and more than double the average from 1993. The study also found that nearly one in three students has at least four credit cards, and that one in 10 will graduate with balances exceeding $7,000.

“Banks will take a risk on young people the way they never would have a decade ago, because they’ve discovered that students have become their best customers because they tend to make the minimum payments,” says Nina Prikazsky, Nellie Mae’s vice president of operations. A student who makes only the minimum monthly payment (usually 2 or 3 percent of the balance) on a card with an 18-percent annual percentage rate and a balance of $2,748 will end up paying as much in interest as she originally charged. It would take her about 15 years to pay off the balance.

But as young people have gained more access to credit, they also have become more prone to financial meltdowns. According to a recent study by Elizabeth Warren, a professor at Harvard Law School, an estimated 120,000 people under the age of 25 filed for personal bankruptcy in 2000. Ms. Warren estimates that bankruptcy filings by Americans under 25 rose 51 percent between 1991 and 1999.

“Bankruptcy reform will fall very hard on young people, especially college graduates who have large student-loan debts and credit-card debts, " Ms. Warren says. “Proponents of bankruptcy reform are wrong to say that young people won’t be affected. In fact, the first adult act for tens of thousands of young people will be to declare themselves financial failures.”

Many consumer advocates also say the pending Bankruptcy Reform Act threatens to cripple the finances of young, debt-ridden people at a time when they can least afford it.

The revamped bankruptcy law would make it far more difficult for consumers to declare Chapter 7 bankruptcy, in which many personal debts are erased. More people would have to file under Chapter 13, which requires repayment of debts over five years. Some consumer advocates say Congress, rather than pass a law that will be hard on indebted students, should take a closer look at credit-card companies.

“The companies that are supporting the bill are the same companies that are dumping credit-card applications all over campus without doing the basic tests to determine whether a student is ready to handle a credit card,” says Travis Plunkett, legislative director for the Consumer Federation of America, which has lobbied against the bankruptcy bill. “Then the same companies are turning around saying that people are abusing the bankruptcy system.”

At Central Oklahoma, Ms. Alford acknowledges that, as an adult, she should be responsible for paying her bills. But she notes that students can amass large debts even if they are not spending irresponsibly.

“I was paying for college myself,” she says. “I hardly ever spent money on going out or having fun. But I still managed to get into a hole just from living expenses, to the point where I felt like the only way I could get out of debt was if I left school.”

That the Bankruptcy Reform Act would raise the hurdles for some consumers is just the point for the credit industry, which has complained for years that too many Americans bail themselves out of debt without paying their bills. The issue of student debt is complicated by the industry’s major support of politicians and educators. Industry groups gave more than $9-million in campaign contributions in 2000, according to the Federal Election Commission. That was just slightly more than the tobacco industry gave, and double the contributions made by gun-rights advocates last year. President Bush’s biggest campaign donor last year was MBNA America Bank, one of the two largest distributors of credit cards on college campuses, and a proponent of the bankruptcy legislation.

Dozens of colleges have banned credit-card marketers from campus. At the same time, MBNA and other companies have teamed up with many colleges to develop programs in which financial planners -- or, in some cases, fellow students -- lead campus seminars in money management.

Still, many large institutions have lucrative financial agreements with banks that issue credit cards. Among other lenders, MBNA and a major rival, First USA, hold sway at many universities. At Columbia University, the MBNA Student Center, which opened in 1996, was built in part with a $25-million donation from the bank. At Georgetown, the company has provided approximately $7-million for the construction of the new MBNA Ryan Performing Arts Center, to open in 2003.

The most widespread example of the business partnerships between academe and the credit industry are so-called monopoly contracts. In its current contract with the University of Oklahoma, for example, First USA will pay the university $13-million over 10 years for the exclusive right to market MasterCards and Visa cards to students, alumni, and employees, and to issue credit cards bearing the university’s name. The bank will also give the school 0.4 percent of every purchase charged with the cards.

First USA and MBNA have similar contracts with scores of colleges, says Robert D. Manning, a professor of humanities at the Rochester Institute of Technology and author of Credit Card Nation (Basic Books, 2000). The marketing of credit cards on college campuses is so aggressive, he argues, that it poses a greater threat to students than alcohol or sexually transmitted diseases.

“Some universities want to plead ignorance and say there isn’t a problem with student credit card debt,” Mr. Manning says. “Meanwhile, those same universities are getting millions of dollars from these contracts. In many cases, the universities that are supposed to be looking out for their students are looking instead at the bottom line.”

Officials at Oklahoma declined to comment on its contract with First USA, except to release a statement saying: “While there may be some concerns [about student credit-card use], any remedy must carefully consider the legal rights of those 18 years of age and older, many of whom are wage earners and are fully or partially self-supporting, and all of whom are citizens with the right to vote.”

Nationally, legislative attempts to limit colleges’ links to credit-card companies have been largely unsuccessful. In 1999, for example, the Tennessee House of Representatives passed a bill that would have stopped the University of Tennessee at Knoxville from collecting about $2.3-million it receives annually from credit card promotions, but the state Senate nixed it.

Despite the mutually profitable contracts with colleges, banking-industry officials dispute the charge that their companies exploit financially inexperienced students. According to industry-sponsored studies, 56 percent of undergraduates pay off their balances in full each month, compared with 43 percent of credit-card users in the general population.

“There should not be laws that limit young peoples’ access to credit,” says Catherine Pulley, a spokeswoman for the American Bankers Association, which supports bankruptcy reform.

“At age 18, people are old enough to drive and old enough to fight for their country, so it is ridiculous to say that they are not personally responsible for understanding credit. Debt is a matter of personal responsibility,” she adds

One politician who is skeptical of the credit-card industry is Rep. Louise M. Slaughter, a New York Democrat. She dumped a basketful of credit-card solicitations on the House floor in March to demonstrate the flood of offers that students receive. “Credit-card issuers are raining down solicitations on college students,” Ms. Slaughter said during her speech. “I regret to say that the bankruptcy [law] that recently passed this House will do nothing to help these young people.”

Ms. Slaughter has introduced a bill that would limit an under-21 student’s credit line to 20 percent of his or her annual income without a cosigner. The bill also would make fee-and-penalty provisions more prominent in credit-card solicitations and agreements. Ms. Slaughter’s bill is currently in subcommittee.

At least three other members of Congress have either proposed bills or tried to attach amendments to the bankruptcy bill that would assist students in debt, but none have generated much support.

Some industry observers believe that restricting students’ access to credit cards is not the right answer. “Young people are going to get credit cards sooner or later,” says Michael E. Staten, director of Georgetown University’s Credit Research Center. “Restricting their access to financial markets and then just turning them loose after graduation with no financial experience is not a good scenario, either.”

Determining what role colleges should play in educating students about credit relates to the same question that often makes devising alcohol-awareness policies so tricky: Should undergraduates be thought of as still-maturing teenagers, or as adults responsible for making their own decisions? The answer, students themselves say, may be a little of both. “Colleges ought to do more to educate students about the dangers of credit,” says Ms. Alford.

“Sure, I was the one actually using the cards over and over,” she says. “But when I came to college, what did I learn about interest rates, credit ratings, and financial realities? Nothing at all. It’s a dangerous situation when the banks know exactly what they are doing, and students don’t have a clue.”

Yet even students who come to college with an understanding of personal finance can fall for the lure of plastic. Rachel Boeke, a senior at the University of Minnesota-Twin Cities, says she worked part time in high school and held herself to a strict budget. Her parents had warned her about the dangers of credit cards.

But when she arrived at the university, in 1997, she saw tables all over the campus offering gifts -- T-shirts, flashlights, pens -- to students who filled out credit-card applications. She felt peer pressure to sign up.

“When you get to college, credit cards are one of many ways of proclaiming your freedom from Mom and Dad,” says Ms. Boeke, who says she obtained 10 credit cards in her freshman year. At 20, she had racked up $3,000 in credit-card debt, which forced her to take two part-time jobs. Between her credit-card bills and her student loans, she will owe about $50,000 in all by the time she graduates.

Recently, she tried to consolidate her debt, but was told that her credit history was too poor. A senior majoring in theater and speech communication, Ms. Boeke now tries not to charge anything. But, she adds, she has not thrown away all of her cards, because she might need to use them in a financial “emergency.” Instead, she has stuffed her remaining cards in a pouch that hides at the back of her closet.

“If I have to dig and crawl back there for it, I’m more likely to stay out of trouble,” she says. “I’ve learned my lesson, although I certainly never expected to have two educations. One came from school, and the other came from my wallet.”

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