Credit Cards on Campus: How Banks Get Around the Student Protection Law

So you thought your kids were safe from the scourge of credit card debt when you sent them away to college this year? Just because Congress passed a student protection law?

Wake up to the real world. Credit card issuers found a glide path right through the law's intent, thanks to their enablers at the Federal Reserve. Kids still have easy access to cards that could drive them into debt. If ever you needed to be reminded why we need a Consumer Financial Protection Bureau, this story should do it.

It begins with 18-year-olds, unused to handling credit, and captured on campus by peddlers of high-rate credit cards. Some students use their new financial freedom wisely but many don't. Roughly one in five are graduating with balances exceeding $7,000, on top of their student loans.

The colleges are complicit. They welcome the banks to the campus and even hand over their students' contact numbers, for sales pitches by mail and online. In return, they get a piece of the revenues earned from kids who don't pay on time. They might also get a fee for every student signed. Not all the colleges play the game but many do.

Last year, Congress tried to put the brakes on runaway campus lending. It passed a law prohibiting banks from offering credit cards to people under 21 unless they have a co-signer or can show that they have enough resources to pay the bills.

In a recent online survey, the National Endowment for Financial Education found that 61 percent of parents would refuse to co-sign a student card and another 16 percent aren't sure. But that isn't stopping the big issuers such as Discover, Citibank, and Capital One. It turns out that most freshman do have the wherewithal to pay -- as least as the banks and the Federal Reserve define it.

You might remember the Fed as that so-called consumer watchdog that ignored toxic subprime mortgages and credit cards even as they were destroying lives. After the bubble broke, Congress stepped in with a set of new rules. Then it handed the pro-bank, anti-consumer Fed the plum job of writing the all-important regulations.

The Fed obliged the credit card industry by writing lax enforcement regs. For example, your child's "income" can include the money you supply as well as scholarships and grants -- never mind that the grants are supposed to pay for college, not credit-card bills.

Worse, your child is considered creditworthy as long as he or she can make the minimum payment on the card each month. That's the lowest standard possible, and opens the credit door to students whom the bank knows can't pay in full. That's exactly what happened in the subprime mortgage market, where loans were made to borrowers who would obviously find it hard to pay.

Finally, the credit card applications ask the students merely to state their income and tell the bank whether they have a checking or savings account. That's it. The Fed imposed no duty on the banks to verify. It's fraud to misstate your income to a banking institution but as long as the bankers make money on you, they don't care.

During the credit bubble, mortgages based on unverified income statements were known as "liar's loans." Now they're appearing in the student world -- courtesy of a Fed that wants to help the banks pump lending up. Only the future Consumer Financial Protection Bureau will care about the kids.

Partly because these cards are so easy to get, the borrowing terms are onerous. Students with zero or thin credit histories will almost certainly be charged the highest rate on unpaid balances -- in the range of 20 percent. If just a single payment is late, the rate might jump to 25 percent or higher and stay there indefinitely.

So before your freshman goes to school, have a money talk. If you approve of first-year credit cards, discuss the importance of on-time payments and the debilitating cost of penalty interest rates. Talk about the money-saving value of paying in full each month. Explain about credit bureaus -- most kids have no idea that their teenage payment histories will follow them for years.

Your child will get a lower interest rate on unpaid balances if you agree to co-sign (assuming, of course, that your own credit history is good). If you keep an account at a credit union or community bank, try there first. Check the child's bills from time to time to be sure that balances aren't building up (the bank will probably increase the credit limit automatically). Late payments and non-payments go on your own credit history as well as on the child's, so co-signing is a risk. If the child can't pay, you'll owe the full amount.

Also, before co-signing, ask the bank how and when you can get your name off the card. As soon as your child builds up a decent credit history, you want to be free.

If you don't like freshman credit cards, talk about alternatives. You might add the child as an authorized user on one of your own credit cards. Every month, he or she can pay what's owed -- by check or through a bank account online. Alternatively, restrict your teens to debit cards while they're learning how to match expenses with the cash flowing through their accounts. In their sophomore year, a credit card could be their graduate course.

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