The New Rules for Student Credit Cards

Students find a way around the new regulations to continue taking on debt while they're in school.

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The CARD Act of 2009 unleashed a whole slew of new limitations on the financial services industry, including capping many of their standard penalty fees, capping the interest rates they are allowed to charge on balances, and even outright forbidding certain types of fees.

Many of these new rules were controversial, with free market evangelists complaining about government overreaching, banks complaining about their poor profit margins, and others complaining that the impact of the rules would be felt first and foremost by consumers. But one aspect of the new legislation that met with little to no resistance, however, was new limitations on student credit card offers.

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Credit card companies love students

Banks have long feasted on unsuspecting young adults by offering them t-shirts, food, and other “free” knick-knacks in exchange for filling out credit card applications. The consequences, of course, were about the same as if cigarette companies were packaging toys with their cartons; the act-now-face-consequences-later attitude of most young adults set them on the road to debt for years to come, resulting in a lucrative source of interest and fee revenue for credit card issuers.

This was supposed to come to an end with passage of the CARD Act, since the legislation expressly forbids banks from handing out tangible items to students who fill out credit card applications, on or near college campuses. It also requires that anyone under 21 who applies for a credit card demonstrate that they have sufficient income to cover the minimum payments.

But Jim Hawkins of the University of Houston Law Center believes the regulations have done very little to prevent credit card companies from marketing on campuses, and that students are still applying for credit cards entirely too easily.

Marketing is still going strong

Mr. Hawkins surveyed 338 students at UH to get an idea of what effects the new rules have had on campus credit card marketing. Despite the CARD Act being in effect for almost all of 2010, 76 percent of the survey’s respondents claimed to have received a credit card offer last year.

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While Hawkins doesn’t have an equivalent survey from the previous year with which to compare and contrast his results, his survey also shows that freshmen are almost as likely to have been exposed to marketing on campus as their upperclassmen counterparts. Since the freshmen have lived their entire college careers so far in a post-CARD world, this argues that campus marketing is still going as strong as ever.

Why isn’t regulation helping?

Despite new rules that are intended to limit the ways card companies can advertise their products to students, the evidence seems to indicate that they are not letting up. So what gives?

It appears that gaping loopholes in the legislation are to blame, since they leave the law largely toothless as currently written. For one, Hawkins points to a comment by the Fed in the Federal Register:

“The Board notes that the prohibition in § 226.57(c) focuses on offering a tangible item. Therefore, creditors are not prohibited by the rule from mailing applications and solicitations to college students at an address that is on or near campus… Moreover, the Board does not believe that comment 57(c)–4 as adopted would include mailings to an e-mail address as it encompasses only mailings to an address that is on or near campus. An e-mail address does not physically exist anywhere, and therefore, cannot be considered an address on or near campus.”

What the Federal Reserve is saying here is that there is nothing in the new rules to prevent these companies from marketing, they just can’t hand out knick-knacks. They’re still as free as ever to mail out as many offers as they please. Not only that, but they are still free to offer tangible gifts via e-mail, since the rules only apply to physical addresses.

The CARD Act also doesn’t specify how exactly students will be required to prove their income for the purpose of credit card applications. By letter of the law, card issuers can simply ask a student what his or her income is, without requesting any sort of proof. According to Mr. Hawkins’s survey, an alarming 29 percent of respondents reported claiming the proceeds for their student loans as income in order to receive a card, which I’m sure is not what Congress had in mind.

No end in sight

Despite the massive amount of regulation that Congress heaved on the financial services industry in the past year or so, college student credit card marketing has been left largely unscathed. Hair-trigger responses from lawmakers left us with more legislation, but less real regulation, so that banks can continue feeding on young adults as they always have.

The most interesting tidbit from the UH survey was that less than half of those students who have more than $3,000 in debt even feel they need a credit card in the first place. So campus marketing is clearly working.

Tim Chen is founder and CEO of NerdWallet.com, a site dedicated to helping consumers find the best rewards credit cards.