How Colleges Are Still Getting Rich Off Your Kids

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College credit cardsIf you want to grab customers for life, get them while they're young. That's the philosophy that credit card companies have used for years to access a lucrative source of profits -- student debt. All they had to do was offer free pizzas or other promotional gifts on campuses to get college students to fill out a card application. Then they doled out plastic and, predictably, many students got into trouble by charging up balances they couldn't repay.

Despite laws designed to stop the practice, colleges and universities are still taking huge payments from card companies -- at your kids' expense.

The New Card Game on Campuses

A newly released report from the Federal Reserve shows that credit card companies paid more than $73 million to schools and affiliated organizations in 2010. About 1.7 million credit card accounts were tied to higher educational institutions, with more than 46,000 of them newly opened during the year.

The sad thing about the latest report from the Fed is that from one perspective, it's actually good news. The $73 million that institutions of higher education got from card companies last year was down from 2009's $84.5 million, and the number of open and new accounts both fell by 17%.

It would be easy for credit card consumer advocates to claim victory by citing the credit card reform laws that Congress passed last year as the main cause for the declines. The new card rules required students under 21 either to prove that they had enough income of their own to pay off their credit card debt or to get a parent or other adult as a co-signer on the account. In addition, the regulations forced card issuers to stop the practice of setting up booths or tables on or near campus that offered free gifts as an incentive for signed card applications.

But as you'd expect, card issuers have found ways around the regulations. Nothing prevents them from doing promotional giveaways as long as they aren't tied to filling out an application. Companies can also market student cards directly to the parents who presumably would end up acting as co-signers for them.

The Alumni Shift

Now it's true that not all of the cards involved are student accounts. The Fed report includes information about alumni associations that are affiliated with colleges and universities, and they receive the lion's share of payments from card issuers. Some of the biggest payments include $4.3 million to the Penn State Alumni Association, for more than 70,000 accounts, and $2.4 million to the Ex-Students Association of the University of Texas.

But even when you look only at colleges and universities themselves and leave out foundations and other affiliated groups, you'll find more than $18 million flowing into their coffers from the credit card industry.

To raise that money on the backs of students who are already strapped for cash -- and more often than not ridden with student loan debt -- seems at best a questionable practice.

The Winners and Losers of the College Card Game

In an era in which many schools are facing severe budget cuts and struggling to get by, money from card agreements can make a big difference. So how do colleges spend that money?

According to USA Today, the Cornell Alumni Federation, which received more than $900,000 from a marketing agreement with card issuer JPMorgan Chase (JPM), said the money went toward a scholarship fund, class reunions, an alumni innovation grant program, and other alumni programs.

But clearly the deals are profitable not just for schools but for the issuers that promote the agreements. Bank of America (BAC) subsidiary FIA Card Services is responsible for almost 85% of all agreements and paid more than three-quarters of all money that schools and their affiliates received from them, with Chase accounting for much of the rest. Other banks, such as US Bancorp (USB) and Barclays (BCS), get only minor amounts from school programs.

Regardless of who wins, the big losers are students who end up with credit cards before they're responsible enough to handle them. As long as colleges and universities take money from card issuers, they must share the blame for the financial devastation that comes from those cards.

Follow Motley Fool contributor Dan Caplinger on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of JPMorgan Chase and Bank of America and also has opened a short position on Bank of America.


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37 Comments

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oshow777

Well let me tell you we foreingners go for the power degrees like for example anything related in the fields of engineering or medical.....our parents instill in us to go big of course........these domestic kids go and waste their time and money in mediocre dregrees for example anything related in the field of liberal arts which at the end will not secure you a good paying job.

July 28 2011 at 5:41 AM Report abuse rate up rate down Reply
marine1942

No government intervention here or investigations as colleges are usually run by union teachers

July 27 2011 at 11:45 AM Report abuse +2 rate up rate down Reply
dgudell

Its the old saying ( its not the gun its the person pulling the trigger ), I wouldnt put all the blame on the colleges or the
credit card companys..........Young people going to college should be responsible for there own actions,
remenber the word is responsible.......Maybe if mom and dad taught and coached these young people a little
more, that it might help to improve there charactor, Face it if you start out thinking you can walk away from debt,
just because you say you didnt know better......YOURE in for a LONG road to hoe........

July 27 2011 at 2:00 AM Report abuse +1 rate up rate down Reply
1 reply to dgudell's comment
rini1946

you are forgetting one thing a lot of these kids will go bankrupt on the card and in the long run we will pay for it . I can see kids getting a credit card for maybe 1 thosand dollars but when they can get 20 grand worth of credit making 3 grand a year .

July 27 2011 at 12:34 PM Report abuse +1 rate up rate down Reply
brennemanbelkin

If you can make credit payments, you can make savings payments.
Pay yourself and only spend what you have.

July 27 2011 at 1:49 AM Report abuse +3 rate up rate down Reply
tunnel3

at least bankrupcy works on credit cards. It does not work on federal loans for skool.

July 26 2011 at 11:55 PM Report abuse +1 rate up rate down Reply
BABIN

You just can't run Economy on entrainment, shopping malls, Home Depot jobs...and usual stuff....

July 26 2011 at 11:42 PM Report abuse +2 rate up rate down Reply
Alicia

If colleges are getting rich off all this credit card company, I'd sure like to know where it's going. It's sure as Hell not going to instructors. Full-time instructors in my department earn between $25,000 and $75,000 a year, even with a Phd. That includes the Chair. And with all the budget cuts that have been hitting us, they have removed phones and trash cans from all the professors' offices. Yes, trash cans - that way they can save money on janitorial services. That said, the cost of a college education these days has gone up quite a bit. Where is all the money going? Well they have built quite a few nice buildings of late, but most of those are for student housing or classrooms. Maybe the money is all going to football coaches' salaries. I understand that they are the highest paid of all state employees.

July 26 2011 at 11:19 PM Report abuse rate up rate down Reply
1 reply to Alicia's comment
societybewary

Tution is ridiculous, and keeps getting worse. Where does the money go? When I was in college (admittedly a long time ago), tuition at a mid-major college was about $1,100.00/year; add another $200/year for books. As a % of my parents income, it was not even close to the burden on a household today if you have a kid in college. Football coaches make huge salaries, but only in the major programs, and those programs are typically self supporting. Anybody know where all the $ is going?

July 27 2011 at 12:08 AM Report abuse +1 rate up rate down Reply
Dan Arnold

I hear big oil, big pharma, big health insurance, etc., constantly being vilified but nobody mentions big college even though their tuition and fees have been going much faster than the rate of inflation forever.

July 26 2011 at 10:45 PM Report abuse +1 rate up rate down Reply
blueeyesolsen

While I have a bachelor degree, graduating in 1959, I can't help feeling that far too many young people are being given an undeserved lesson in being victims of an elaborate confidence game. Many of the degrees they study to obtain have about the same value as waste paper. Many who have masters degrees are less well educated than children who graduated from the eighth grade in 1900, when that was the end of formal education for many. Upon graduation, today's graduates are often qualified only for jobs that require no real education at all, and have a huge debt burden besides. With some notable exceptions, medicine, engineering, applied mathematics, computer science, physics, and chemistry, for examples, many of the degree programs are little more than structured nonsense. Going to college became a kind of fad upon which administrators built little empires while destroying real education in order to admit a large number at exhorbitant prices to justify their salaries and perks.

July 26 2011 at 10:45 PM Report abuse +2 rate up rate down Reply
1 reply to blueeyesolsen's comment
marine1942

Can you say "affermative action" ??

July 27 2011 at 11:47 AM Report abuse rate up rate down Reply
1 reply to marine1942's comment
orlywm

why affirmative action?

July 28 2011 at 5:25 AM Report abuse rate up rate down
inxsofspex

For crying out loud.You mean intelligent, thoughtful people no longer go to college.If you are not smart enough to manage your money then you need to get out of college now.Try some vocational training that gently guides you to focus on understanding making money work for you.

July 26 2011 at 10:27 PM Report abuse +1 rate up rate down Reply