[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
PROBLEM CREDIT CARD PRACTICES
AFFECTING STUDENTS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
JUNE 26, 2008
__________
Printed for the use of the Committee on Financial Services
Serial No. 110-125
HOUSE COMMITTEE ON FINANCIAL SERVICES
U.S. GOVERNMENT PRINTING OFFICE
44-190 PDF WASHINGTON DC: 2008
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BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania SPENCER BACHUS, Alabama
MAXINE WATERS, California DEBORAH PRYCE, Ohio
CAROLYN B. MALONEY, New York MICHAEL N. CASTLE, Delaware
LUIS V. GUTIERREZ, Illinois PETER T. KING, New York
NYDIA M. VELAZQUEZ, New York EDWARD R. ROYCE, California
MELVIN L. WATT, North Carolina FRANK D. LUCAS, Oklahoma
GARY L. ACKERMAN, New York RON PAUL, Texas
BRAD SHERMAN, California STEVEN C. LaTOURETTE, Ohio
GREGORY W. MEEKS, New York DONALD A. MANZULLO, Illinois
DENNIS MOORE, Kansas WALTER B. JONES, Jr., North
MICHAEL E. CAPUANO, Massachusetts Carolina
RUBEN HINOJOSA, Texas JUDY BIGGERT, Illinois
WM. LACY CLAY, Missouri CHRISTOPHER SHAYS, Connecticut
CAROLYN McCARTHY, New York GARY G. MILLER, California
JOE BACA, California SHELLEY MOORE CAPITO, West
STEPHEN F. LYNCH, Massachusetts Virginia
BRAD MILLER, North Carolina TOM FEENEY, Florida
DAVID SCOTT, Georgia JEB HENSARLING, Texas
AL GREEN, Texas SCOTT GARRETT, New Jersey
EMANUEL CLEAVER, Missouri GINNY BROWN-WAITE, Florida
MELISSA L. BEAN, Illinois J. GRESHAM BARRETT, South Carolina
GWEN MOORE, Wisconsin, JIM GERLACH, Pennsylvania
LINCOLN DAVIS, Tennessee STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota TOM PRICE, Georgia
RON KLEIN, Florida GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida PATRICK T. McHENRY, North Carolina
CHARLES A. WILSON, Ohio JOHN CAMPBELL, California
ED PERLMUTTER, Colorado ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana PETER J. ROSKAM, Illinois
BILL FOSTER, Illinois KENNY MARCHANT, Texas
ANDRE CARSON, Indiana THADDEUS G. McCOTTER, Michigan
JACKIE SPEIER, California KEVIN McCARTHY, California
DON CAZAYOUX, Louisiana DEAN HELLER, Nevada
TRAVIS CHILDERS, Mississippi
Jeanne M. Roslanowick, Staff Director and Chief Counsel
Subcommittee on Financial Institutions and Consumer Credit
CAROLYN B. MALONEY, New York, Chairwoman
MELVIN L. WATT, North Carolina JUDY BIGGERT, Illinois
GARY L. ACKERMAN, New York TOM PRICE, Georgia
BRAD SHERMAN, California DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois MICHAEL N. CASTLE, Delaware
DENNIS MOORE, Kansas PETER T. KING, New York
PAUL E. KANJORSKI, Pennsylvania EDWARD R. ROYCE, California
MAXINE WATERS, California STEVEN C. LaTOURETTE, Ohio
RUBEN HINOJOSA, Texas WALTER B. JONES, Jr., North
CAROLYN McCARTHY, New York Carolina
JOE BACA, California SHELLEY MOORE CAPITO, West
AL GREEN, Texas Virginia
WM. LACY CLAY, Missouri TOM FEENEY, Florida
BRAD MILLER, North Carolina JEB HENSARLING, Texas
DAVID SCOTT, Georgia SCOTT GARRETT, New Jersey
EMANUEL CLEAVER, Missouri GINNY BROWN-WAITE, Florida
MELISSA L. BEAN, Illinois J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee JIM GERLACH, Pennsylvania
PAUL W. HODES, New Hampshire STEVAN PEARCE, New Mexico
KEITH ELLISON, Minnesota RANDY NEUGEBAUER, Texas
RON KLEIN, Florida GEOFF DAVIS, Kentucky
CHARLES A. WILSON, Ohio PATRICK T. McHENRY, North Carolina
GREGORY W. MEEKS, New York JOHN CAMPBELL, California
BILL FOSTER, Illinois KEVIN McCARTHY, California
ED PERLMUTTER, Colorado DEAN HELLER, Nevada
C O N T E N T S
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Page
Hearing held on:
June 26, 2008................................................ 1
Appendix:
June 26, 2008................................................ 43
WITNESSES
Thursday, June 26, 2008
Clayton, Kenneth J., Managing Director and General Counsel, ABA
Card Policy Council, American Bankers Association.............. 14
Lawsky, Benjamin, Deputy Counselor and Special Assistant to the
Attorney General, Office of the Attorney General (New York).... 8
Lindstrom, Christine, Director, Higher Education Project, U.S.
PIRG........................................................... 10
Neiser, Brent A., Director of Strategic Programs and Alliances,
National Endowment for Financial Education..................... 17
Thurman, Brett, President, Undergraduate Student Government,
University of Illinois at Chicago.............................. 12
Williams, Erica L., Policy and Advocacy Manager, Campus Progress
Action......................................................... 16
APPENDIX
Prepared statements:
Maloney, Hon. Carolyn B...................................... 44
Hinojosa, Hon. Ruben......................................... 46
Hodes, Hon. Paul............................................. 48
Waters, Hon. Maxine.......................................... 49
Clayton, Kenneth J........................................... 53
Lawsky, Benjamin............................................. 61
Lindstrom, Christine......................................... 73
Neiser, Brent A.............................................. 81
Thurman, Brett............................................... 86
Williams, Erica L............................................ 89
Additional Material Submitted for the Record
Maloney, Hon. Carolyn B.:
Written statement of Hon. Louise M. Slaughter................ 96
Hinojosa, Hon. Ruben:
``Chairman Miller Statement on FTC's New Consumer Guide on
Student Lenders' Deceptive Marketing Practices,'' a press
release from the Committee on Education and Labor dated
June 25, 2008.............................................. 98
FTC Facts for Consumers...................................... 99
``The Campus Credit Card Trap, A Survey of College Students
and Credit Card Marketing,'' a report issued by U.S. PIRG
Education Fund, dated March 2008........................... 103
PROBLEM CREDIT CARD PRACTICES
AFFECTING STUDENTS
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Thursday, June 26, 2008
U.S. House of Representatives,
Subcommittee on Financial Institutions
and Consumer Credit,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:02 p.m., in
room 2128, Rayburn House Office Building, Hon. Carolyn B.
Maloney [chairwoman of the subcommittee] presiding.
Members present: Representatives Maloney, Watt, Moore of
Kansas, Hinojosa, Green, Clay, Scott, Cleaver; Biggert, Castle,
Jones, and Hensarling.
Chairwoman Maloney. I call this hearing to order. This
hearing, entitled ``Problem Credit Card Practices Affecting
Students,'' focuses on the issues that arise in the context of
credit card marketing to students, especially college students.
I welcome the witnesses, and I thank them very much for being
here, and for their testimony.
This hearing is the outgrowth of response to our
comprehensive credit card reform bill, the Credit Cardholders'
Bill of Rights. At our roundtable last year, and in later
discussions, it became clear that many issuers, consumer
advocates, and Members share a special concern with students'
use of credit cards.
As new entrants to credit, students seem particularly
vulnerable. As some of you will recall, in the late 1990's,
credit card marketing on campuses became the subject of press
reports and controversy. At the request of Congresswoman Louise
Slaughter, Congressman John Duncan, and Congressman Paul
Kanjorski, the GAO undertook a study of college students and
credit cards issued in June of 2001.
I would like to take this opportunity, with unanimous
consent, to enter into the record Congresswoman Slaughter's
testimony.
The GAO concluded that while credit cards offered students
many advantages, there were grounds for concern that college
students were more likely than other credit card users to end
up with high debts.
As the GAO report found, credit card issuers market
intensively to college students. This is not surprising.
Students represent new customers who live bunched together, and
are thus cost-effective to reach. Students want and often need
credit, but may not realize all the consequences of applying
for or getting a credit card.
In some cases, schools facilitated the issuers' efforts to
market cards to students. In his 2000 book, ``Credit Card
Nation,'' Professor Manning of the University of Rochester
documented arrangements between universities and colleges and
issuers, under which the schools received money from the
issuers for the right to market credit cards on campus to the
students. Manning found that these agreements resulted in
payments to the 300 largest universities of some $1 billion.
About 18 States have since passed laws restricting or
regulating on-campus marketing by issuers. In addition, many
schools have banned on-campus marketing.
But the issue is not resolved. This spring, New York
Attorney General Andrew Cuomo announced that his office was
conducting a nationwide investigation into whether credit card
marketers offered payments or other incentives to colleges in
exchange for exclusive access to the institution's students.
Marketing to students often involves offering a reward for
applying for a card. In a March 2008 survey, U.S. PIRG listed
tee shirts, food, sports toys, caps, mugs, and sodas as
commonly offered gifts.
Seven years after the GAO report, major issuers have
introduced a number of important policy changes to address the
special problems of students and credit cards. For example,
American Express says that their Blue for Students card has
more stringent limits on the size of credit lines than the
normal blue card, and that they do not actively market to
students, on campus or otherwise.
Citi's Platinum Select card was acknowledged by Consumer
Action for rewarding students based on responsible credit
behavior, and was a top pick for best student credit cards, as
reported in SmartMoney.com in August.
Bank of America says it caps students' available credit at
$2,500, and does not raise students' interest rates
retroactively for any reason.
I applaud these and similar efforts which represent best
practices consistent with the standard principles for voluntary
action that resulted from the roundtable on credit cards I
convened last year. But the question is, are voluntary efforts
enough? Will the force of competition drive those who want to
move to best practices back to doing less? And, ultimately,
what is the best way to ensure that students become responsible
users of credit?
In fact, studies since the GAO report show that credit card
debt held by students is rising. Using data from the Federal
Reserve survey of consumer finance from 2004 and 1989, the
nonpartisan organization DEMOS calculated that young adults
between ages 18 and 24 have 22 percent higher credit card debt
than their peers had in 1989.
Similarly, studies conducted by Nellie Mae show a
significant rise in credit card usage among students. A 2005
report done by Nellie Mae of students in college found that 76
percent of undergraduates had a credit card, as opposed to 67
percent in 1998, that 43 percent have 4 or more cards, as
opposed to 27 percent in 1998, and that the average balance on
student credit cards was over $2,000, up from $1,800 in 1998.
Perhaps of most concern, students' use of credit cards to
pay for tuition is also going up, even though Federal student
loans are generally available at lower rates, and on more
flexible repayment terms. In the 2001 GAO study, about 12
percent of undergrads said that they used credit cards to pay
for tuition. The 2005 Nellie Mae credit report study showed
that figure doubling; 24 percent of undergrads used credit
cards to pay tuition.
These are the issues we will be looking at. I look forward
to the testimony. And I now yield to Mrs. Biggert, for as much
time as she may consume.
Mrs. Biggert. Thank you, Madam Chairwoman, for holding this
hearing to address credit card practices affecting students. I
am glad that today we will recognize the success story of
students' access to credit. On the other hand, I am also
pleased that we will be looking into problems that some
students have, ranging from selecting the right credit card to
difficulty managing their credit, or a budget, for that matter.
Of course, another related issue, but for another day and
another committee, is how the College Cost Reduction Act has
caused the student loan market to dry up. This fall, more
students may find their credit card a financial life preserver,
unless we fix some of the provisions of that other bill.
But today it is important that we look into an inclusive
activity among colleges and universities or their employees and
credit card companies. Some disturbing studies indicate that
such activities have led to unfair marketing practices and
reduced card competition on campuses. Institutions of higher
education should be safe harbors for students to learn and to
grow. This should include educating students about credit, how
to use it, and most importantly, how to use it responsibly.
Like advisors that steer students away from the wrong
class, I think it's important that students are advised on
matters of finance, and steered away from the wrong financial
product, whether it be a credit card, a student loan, or other
line of credit.
It is important that we help students, as well as all young
people, understand the importance of establishing credit and a
good credit record at a young age. It is the financial
foundation on which they will build their future.
Unfortunately, starting off on the wrong foot seems to be a
trend among some college students, who first look at the free
apparel, a tee shirt or a coupon for free food, before looking
at the interest rate or payment terms of a credit card. And
that is a problem.
Students need to understand that there is no such thing as
a free lunch. We know that the U.S. financial literacy rates
are low. Courses in personal finance and economics are not a
top priority, compared to English, math, science, and history.
That is a problem, too. Personal finance and economics should
be a top priority for colleges and universities, technical
schools, secondary schools, students, student governments, and
organizations.
And, some would argue, for Members of Congress, as well. I
don't think my colleagues would disagree with me when I say
that some Members could use a little Econ-101. But I digress.
The government, colleges and universities, credit card
companies, and our students need to work together to strike the
right balance between consumer education and fair and
transparent credit card marketing. How we accomplish that goal,
through legislation, regulation, competition, private sector
innovation, financial education, or a combination of these, is
what brings us here today.
I believe that today's witnesses will reveal how financial
education can and should play one of the biggest roles in this
effort. My goal is to promote financial education on college
campuses, so that students are armed with the financial tools
that they need to use credit wisely, while not cutting off
students' access to credit.
College students have greater access to credit, access to
cheaper credit, and access to financial education today than
ever before. So I hope that no action Congress takes will
reverse that positive trend.
With that, I look forward to hearing from today's
witnesses, and yield back the balance of my time.
Chairwoman Maloney. Thank you. I yield 4 minutes to
Congressman Cleaver, who has his own bill on this very
important subject.
Mr. Cleaver. Thank you, Madam Chairwoman, and I would like
to express appreciation to you for all of the work that you
have done on this issue. And I am very much appreciative of the
opportunity to participate in this hearing.
The impact of credit cards on the lives of minors and
students is a particular focus of mine, and I am pleased that
we are coming together today for the opportunity to discuss it.
In March of 2007, Congressman Udall and I introduced H.R.
1461, the Credit Card Accountability Responsibility and
Disclosure Act of 2007. This legislation, important as far as
we were concerned, included a provision which enumerated the
responsibilities which credit card issuers must undertake in
order to issue credit cards to minors.
I believe that this is extremely important because we, as a
Nation, cannot allow young people to go into the kinds of debt
that they are experiencing, because I can foresee a similar
problem with credit cards that we have had with subprime loans.
I will talk more about that as we go along.
I read in my hometown newspaper, the Kansas City Star, that
according to the April 9th JumpStart survey, high school
seniors correctly answered just under one-half of the questions
on a financial literacy test. This shows that minors are not
getting enough financial literacy education. And, thus, giving
them credit cards without the kinds of knowledge that they need
is, I think, doing a great disservice to them.
What we are saying is that they must have a steady and
substantial income with which to pay off the credit card debt
if they are issued a credit card. And, of course, if a minor is
legally emancipated, he or she only has to prove that they can,
in fact, pay that credit card debt.
Now, I want to get into some serious discussion with our
panelists, and I appreciate them coming. I need to add one
other, I think, important fact.
From one perspective, I think that it is reasonable and we
are somewhat justified in seeing that college students who work
have an opportunity to get credit cards. I think it's important
to understand that 55 percent of students report that they work
part-time in college; 45 percent of the students who are in
college today do not work at all. And credit card issuers must
disclose the terms of an agreement, and they all who are
represented here today will say they do that.
But according to the 2006 GAO report, increased complexity
in rates and fees heighten need for more effective disclosure
to consumers. Some of these statements are written in a 27th
grade language. And so let's take, for a moment, if I graduate
from elementary school, middle school, high school, get a BA
degree, go to seminary, and then come out and get a Ph.D., I
will still have at least 3 years to go before I reach the 27th
grade. And we are saying that these college students, many of
them 18 or 19 years old, ought to be given credit cards.
I think that this is a step in the wrong direction. Many of
these students are going to get out of college, end up in the
same situation with the subprime individuals, and they're going
to find that they cannot pay their debts. It is a tragedy
waiting to happen. I have seen it happen in my own family with
my own son, who has no business having a credit card. He barely
has business having cash.
And I think it is doing enormous damage for us to come to
the conclusion that we can just send out credit cards because
college students may be in the higher-income levels of society.
I think it is wrong, and I think we have to put some stops to
it today.
I appreciate it, and I yield back the balance of my time.
Chairwoman Maloney. The Chair recognizes Mr. Hensarling for
5 minutes.
Mr. Hensarling. Thank you, Madam Chairwoman. As I look upon
the title of today's hearing, ``Problem Credit Card Practices
Affecting Students,'' I am just curious if I will see a hearing
one day, ``Solution Credit Card Practices Affecting Students,''
because as I observe the market, the ability of students to
have access to credit cards creates a whole lot more solutions
than it does problems.
Now, I have seen through this hearing that we will hear
genuinely sad tales of lives that have been significantly
harmed by abusive credit cards. I assume these tales will be
true, I assume they will be sad, and I assume we should pay
very careful attention to them.
But I am also curious during this hearing whether or not we
will hear tales of students who: but for access to a credit
card, could not pay their tuition; but for access to a credit
card, could not pay for their books; but for access to a credit
card, could not pay for their room or board; but for access to
a credit card, could not fly home during the holidays; and the
list goes on and on.
I have no idea why, but when I was a sophomore at Texas A&M
University, some credit card company decided that I was worthy
of a credit card. They sent me a mail solicitation. I didn't
seek the card. They sent it to me, and I was glad to receive
it. By no stretch of the imagination do I come from a poor
family, but I don't come from a rich family, either.
I worked my way through school, bussing tables, working on
a loading dock, and being a night clerk. My ability to have
that credit card several times helped me with automobile
repairs on a very decrepit 1965 Ford Mustang. And I wonder, but
for that credit card, I wouldn't have been able to afford those
repairs. But for those repairs, I would not have been able to
go to work. Had I not been able to go to work, I could not have
completed my college degree.
Now, I have one testimonial for the fact that at least this
particular individual was very happy to receive a credit card,
and it served a very useful purpose in my educational life.
Whatever the perceived or real illness in the student
credit card market may be, I fear that any cure from this
committee may prove worse than the illness. Having said that,
though, I am, with some interest, interested in viewing further
the details of the gentleman from Missouri's bill. And
particularly if it deals with credit card issuance to minors, I
think it would be very, very worthy of serious contemplation
and consideration by this committee, and I am always happy to
surprise my friend from Missouri and occasionally say nice
things about his legislation.
But again, I think we must remember that every restriction,
every limit, every regulation has a high probability of making
credit less accessible, less affordable, and more costly,
ultimately helping rob people of their educational
opportunities. Especially at a time of skyrocketing tuition,
when we know that the student loan market is in full
retrenchment, I would hope this committee would not consider
any legislation where the cure is going to prove worse than the
illness, and rob thousands--tens of thousands, perhaps--of
their educational opportunities.
And, as an aside, let's remember, with very few exceptions,
the people in college are legal adults. They can vote, they can
contract, they can marry, and they can serve this Nation in
uniform. Are we going to deny them their basic freedom, their
freedom of economic opportunity to own a credit card?
I see at least one study, as another aside, that shows that
students pay off their credit card bills on time 65 percent of
the time, which is better than the adult population, as a
whole.
Now, again, I have no doubt that there are abuses in the
market by credit card companies. I don't doubt that. I don't
doubt that many students do not use credit responsibly. But
maybe the solution would be greater financial literacy. Maybe
the solution would be more effective disclosure. Maybe part of
the solution is personal responsibility, and maybe part of the
solution is even increased enforcement of our anti-fraud and
deceptive trade practices law. And I suspect that would prove
to be far, far more beneficial to our student population than
anything else that would deny them access to credit cards, make
it less available, more expensive, and help deny them their
educational opportunities.
And with that, Madam Chairwoman, I yield back.
Chairwoman Maloney. The Chair recognizes Congressman Scott
for 3 minutes.
Mr. Scott. Thank you, Madam Chairwoman. I really appreciate
this timely hearing. This issue is very, very important. It is
not just a personal financial issue; it is a problem for the
entire Nation. Household debt has ballooned from $59 billion in
1980 to $830 billion, as of 2006. Just this statistic alone
recognizes the importance and the gravity of the issue.
And nowhere is it more important for us to reign in the
abuses of credit cards than with our young people, and
especially they are a targeted group.
Now, there are some in the credit card industry that are
doing some beneficial things, and correcting this. I want to
single out, for example: JPMorgan Chase and Citigroup, as we
all know, have made some changes to their business practices,
and they should be commended.
But there are far too many deceptive practices that are
going on. I would like to just address one important thing
about what we can do, because no matter what the industry does,
the issue finally boils down to that individual taking
responsibility for his or her own decisions. And we have to
help that.
We have to help our college students be able to understand
the responsibility on their part. That credit card is sort of
like a rope that is given to a man to pull himself up. He can
either use that rope to pull himself up, or he can use that
rope to hang himself. It's up to that individual. And in so
many cases, our college students are using this credit card, or
rope, to cause damage to themselves.
So, maybe we can focus on a few things. For example, why
not bring the parents into this? We are looking at kids who are
16, 17, 18, and 19 years old. They are just at the start of
their lives. They don't have the gravity of experience that
older people do. And I think that might be an example. Parents
have to become more proactive in their students' lives, in
their childrens' lives, as far as talking to them about money,
and explaining the pitfalls of financial debt and consequences.
For every action, there is a consequence to that.
We need to see if there are any programs we can come up
with that can be available which parents can utilize to this
end. In the final analysis, oftentimes it is the parents who
have to bail them out, and pay these bills. So, it makes sense.
Are there any specific classes that are going on on the college
campuses themselves that relate to financial literacy?
Financial literacy and education is the area that we are
not paying enough attention to. And if you are financially
literate, if the students are geared--and the parents--to read
the fine print, to know what you're getting into before you
sign up to these cards--it's not just a card there to get.
And I think that this is very important, Madam Chairwoman.
Thank you very much for the opportunity, and we will get into
some of this as we move forward.
Chairwoman Maloney. Thank you very much. And our last
speaker is Congressman Castle for 5 minutes.
Mr. Castle. Thank you, Madam Chairwoman. In preparation for
this hearing, I talked to some of the folks on my staff who
attended college more recently than I attended. They all
attended college more recently than I did, but I only spoke to
a few them about their overall understanding of credit cards.
Each of them knew that credit cards are not free money, but
that, indeed, anything bought with a card would have to be
repaid. These individuals were taught by their parents or
others while in high school about the importance of being
responsible with credit.
However, some statistics have suggested that 18-year-olds
are more likely to take on more credit card debt than adults
over age 22. We cannot make these new credit card users utilize
credit more wisely. But I strongly believe that education and
consumer choices would greatly benefit students and help reduce
the incidence of irresponsible use of credit cards.
I would like to emphasize that credit cards, when used
responsibly, can be beneficial to younger adults. For most
students, buying books and supplies for one semester can cost
more than $500. In addition, some students may have their heart
set on graduate school, and building credit through use of
credit cards could expand their choices when applying for
student loans.
Just like you and me, students may encounter unexpected
expenses: car maintenance for commuters; an airplane ticket
home to visit relatives; or even a trip to the emergency room
for a school athlete. Unlike students, some of us could pay for
these expenses immediately, because we have full-time jobs that
provide us with a steady income. Students, on the other hand,
could benefit from having extra time to make a payment through
the use of a credit card, while at the same time building a
credit history for their future.
With that, I look forward to hearing the testimony of the
panel before us. And, in particular, I commend Mr. Thurman for
his efforts in increasing awareness among his peers with regard
to student debt in the face of the rising costs of college
education. I yield back, Madam Chairwoman.
Chairwoman Maloney. Thank you very much. We are fortunate
today to have six witnesses: Benjamin Lawsky, deputy counselor
and special assistant to Attorney General Cuomo; Christine
Lindstrom, director of the higher education project of U.S.
PIRG; Brett Thurman, president, undergraduate student
government, at the University of Illinois at Chicago; Kenneth
Clayton, managing director and general counsel, American
Bankers Association, card policy council; Erica Williams,
policy and advocacy manager, Campus Progress Action; and Brent
Neiser, director of strategic programs and alliances for the
National Endowment for Financial Education.
Without objection, your written statements will be made a
part of the record. You will each be recognized for a 5-minute
summary of your testimony. I now recognize Mr. Lawsky, and we
will go right down the row.
STATEMENT OF BENJAMIN LAWSKY, DEPUTY COUNSELOR AND SPECIAL
ASSISTANT TO THE ATTORNEY GENERAL, OFFICE OF THE ATTORNEY
GENERAL (NEW YORK)
Mr. Lawsky. Thank you very much. I really appreciate your
having us here today. Attorney General Cuomo would have loved
to have been here. We had a large narcotics take-down scheduled
for today, and he couldn't make it. He is back in the State.
Let me start by saying that I am not an expert, like other
members of this panel probably are, in the credit card
industry. What I can do is tell you about the investigation we
have ongoing, to some extent.
And I want to add one other caveat, which is that because
our investigation of the credit card industry is ongoing, there
are certain things, unfortunately, I can't fully get into, and
I may have to defer on certain questions you ask.
With that said, in 2007, Attorney General Cuomo began a
large-scale nationwide investigation of the student loan
industry, as you alluded to in your opening statement. And that
investigation indicated--and what we found was--that lenders
around the country were paying off schools, basically, to
become the recommended lenders at the universities. They were
basically paying to be the recommended lender to the students.
It was enormously lucrative to the lenders, and it was also, at
times, lucrative to the schools.
We settled quite a few of those cases. Most of the schools
and the lenders agreed to stop the practices. But, ultimately,
what we did was we sponsored legislation, first in Albany and
then, with the help of our friends here in Washington, a bill
is now pending. It is in the Higher Education Act, and it
hopefully will pass relatively soon, the Student Loan Sunshine
Act, which will ban these practices across the country.
But what our investigation of the student loan market
indicated to us that is relevant for today is really two
things. First, that student debt in this country is enormous.
And second, that the use of the university by businesses as a
bottleneck to get access to students through relationships with
business officers at schools was something that wasn't just
limited to the student loan industry. We started looking in
other areas, and we found it with textbooks, we found it with
computers, we found it with healthcare plans for students, and
we found it in the food service industry. And, maybe most
disturbingly, we found it in the credit card industry, as well.
So, we have investigations going on in all those areas. But
with respect to the credit card industry, what we found was--
and what we are continuing to find--is at a very, very large
number of universities around the country, there are highly
lucrative, somewhat secret, exclusive marketing agreements at
the schools with particular credit card companies. The schools
have, in many cases, agreed not to make these agreements public
to anyone.
Fortunately for us, because we have a little something
called the subpoena, we have been able to obtain at least many
of those agreements, and we have been able to really analyze
many of the provisions in them. And I think when those
provisions in these agreements become public some time
relatively soon, I think it will shock many people, the kind of
relationships that some of these credit card companies have
with the schools.
These deals usually give very significant marketing rights
to the credit card companies at the universities. Often, for
example, there will be a provision that says you get to--the
university will provide a list of all student data, so you get
the student's e-mail addresses, you get their home addresses,
you get their school addresses, you get their phone numbers,
and you can market to them by phone 3 times a year, and by mail
4 times a year. And in return, the school is going to get paid
$1 million or $2 million a year.
The marketing practices that then go on at the
universities, which I am sure my colleagues will talk about in
greater detail, are extremely aggressive. They often involve
giving away free goods to entice students to sign up for cards,
and they often involve using students to recruit more students,
actually using peer pressure to get more students to sign up
for cards.
We are most focused right now, though, on the--what are
called sometimes affinity arrangements, which is where the
schools allow in the agreements--they are getting paid,
basically, to allow the credit card companies to co-brand and
market their cards, for example, as the Georgetown Card, or the
Harvard Card, or the Yale Card.
And that is very similar to what we found in the student
loan investigation, where there was an endorsed--a payment to
the schools to allow--and the schools, in return for that
payment, were basically representing to students, ``This is our
preferred lender.'' Here, it's, ``This is our preferred credit
card.'' And students, of course, trust their alma mater, they
trust their schools. It is enormously powerful, and the groups
know this. And we are busy investigating that relationship very
closely, and obviously, we will continue to do so.
I see I am out of time, but I will just say absolutely we
certainly stand ready, as we did in the student loan industry,
as our investigation proceeds. To the extent there is a
systemic solution that works, it probably makes sense
ultimately for that solution to come from a legislative body.
And we certainly stand ready to help in any effort here to do
that. Thank you.
[The prepared statement of Mr. Lawsky can be found on page
61 of the appendix.]
Chairwoman Maloney. Ms. Lindstrom for 5 minutes.
STATEMENT OF CHRISTINE LINDSTROM, DIRECTOR, HIGHER EDUCATION
PROJECT, U.S. PIRG
Ms. Lindstrom. Good afternoon. Thank you for the invitation
to address the issue of credit cards on campus. My name is
Christine Lindstrom, and I am the higher education program
director for U.S. PIRG. I work with college students on
campuses across the country to make sure that college stays
affordable and accessible.
Our data suggests that credit card debt among college
students is growing. We have also documented that excessive,
high-cost credit card debt has exacerbated the crisis that
students already face from the rising costs of higher
education. Our project has focused on several areas where
educational costs have skyrocketed. We have mentioned some of
them.
Basically, if States have pulled back on funding for public
higher education, more of the cost of college has fallen on the
shoulders of college students. Now students are increasingly
burdened with educational debt, which can cause them, once they
graduate, to opt out of lower-paying, but socially valuable
careers, like teaching.
In addition, textbook costs, as well as other ancillary
educational costs, continue to increase. And, as a result,
students have become more reliant on their newly acquired lines
of credit to help offset these costs.
From that vantage point, last fall, we launched the Truth
About Credit campaign on college campuses across the country.
The project has two goals. First, we are educating students
about being good credit card consumers through a counter-
marketing campaign that we call FEESA. It has a tag line
stating, ``Free Gifts Now, Huge Debt Later.'' We are actually
dressed up like credit card marketers on the campus, complete
with polo shirts, and we're able to educate students about
being able to navigate the marketplace.
We have literally passed out thousands of these booklets,
``The Consumer's Guide to Credit Cards,'' on hundreds of
campuses across the country, and requests roll in every day
from campus administrators to be able to use these guides in
orientation, and to help with their education efforts.
Second, we are working with student governments and
administrators to establish principals on campus that reign in
aggressive credit card marketing on the campus marketplace.
As part of this effort, last fall, we conducted a major
survey and released the results in March. And that is a report
called, ``The Campus Credit Card Trap.'' You have seen some of
the detailed results of this survey in my written testimony
that I submitted. What we did find is that, indeed, college
students are a target market for the industry.
Students are literally inundated with marketing tactics
from credit card issuers, with high numbers of them reporting
regular telephone solicitations, and 80 percent of the
participants reporting that they receive mail solicitations.
Some reported hundreds, but on average we found that students
got about five solicitations a month from credit card issuers.
And, of course, they are regularly enticed into applying
for credit cards at tables on campus through the offer of free
gifts like pizza, candy, tee shirts, and beach chairs. And in
one instance, we found iPods being raffled off for credit card
applications on campus.
Our survey also found that, indeed, students are using
their credit cards to offset educational costs. A full 55
percent of participants had paid for textbooks on their credit
cards. And our other studies show that students pay, on
average, $900 a year for textbooks.
Fifty-five percent of participants report putting day-to-
day expenses on their credit card, including gas and public
transportation costs to get back and forth to school. And as
noted, 24 percent of our survey participants also reported
putting tuition on their credit cards.
Additionally, a significant number of participants had gone
over the limit on their cards, and had lost a card already, as
a result.
Students in the survey supported our principles for
responsible credit card marketing, including a policy to stop
sharing their names with the credit card industry, a policy
that would promote a fair card with better terms and conditions
to be available for application on the campus, and a policy
that banned the use of free gifts, which so often obscures
students' abilities to be good consumers, when considering
whether or not to apply.
U.S. PIRG has looked at a number of pieces of legislation
addressing the issue of credit card marketing. We believe that
the best marketing solutions can be implemented on a campus-by-
campus basis. However, we support legislation that would give
students the ability to choose if they would like to have their
names sold to credit card issuers for marketing purposes.
We also support a variety of legislative proposals that
attempt to ban or control some of the more unscrupulous terms
and conditions contained in credit card contracts.
I would like to make a final point that we do not think
that college students should be banned from being able to
access or use a credit card. Instead, we think that college
students should be treated just like every other consumer in
America with no special rights or privileges, and be able to
apply for and get credit according to the same standards as
everybody else.
Currently, underwriting standards are generally waived for
college students, so they meet no income or credit background
criteria in order to qualify for credit. Such lax standards
have created a campus marketplace in which students are
unfairly marketed to, taken advantage of with bad terms and
conditions, and plunged deeper into debt.
Thank you for your time.
[The prepared statement of Ms. Lindstrom can be found on
page 73 of the appendix.]
Chairwoman Maloney. Mr. Thurman?
STATEMENT OF BRETT THURMAN, PRESIDENT, UNDERGRADUATE STUDENT
GOVERNMENT, UNIVERSITY OF ILLINOIS AT CHICAGO
Mr. Thurman. I don't have the statistics that some of my
colleagues here at this table have. Instead, what I have for
you is a story. I would like to thank you very much for taking
the time to listen to a student. And I would like to ask your
patience with me, as this story is just very blunt, very point
of fact, and not with any statistics to back it up. I rely upon
my colleagues here for that.
I attend school at the University of Illinois at Chicago.
Our university has very strict policies about credit card
companies not being allowed on campus to offer any kind of
information, to offer any kind of solicitation, or offer any
kind of prizes or free food to our students.
As a response to this, I have noticed in both my freshman
and sophomore years--this would be 2005 and 2006--that you will
encounter a student, or someone who appears to be a student on
campus, and they will give you a piece of paper, and that piece
of paper will say, ``Subway, free sub sandwich Monday through
Friday, 1:00 p.m. to 5:00 p.m.'' for example, ``just this week
only,'' and this will be in the first 2 weeks of school.
The Subway is exactly 1,020 feet away from the nearest
university building. I went ahead and paced it off earlier this
week. You go to the Subway, you hand the piece of paper to the
cashier, and he tells you it's not really a coupon, you need to
see the gentleman in the corner. You go to see the gentleman in
the corner, and he has a form for you to fill out. It is an
application for a Discover Card.
At this point, I really don't have a problem with what has
happened so far. I understand that is a marketing technique. I
understand that some people would consider it a little shady.
But I am a student of political science. I am a student of the
markets, and I am fine with people trying to find ways to
pursue their market advantage.
Here is the problem I have. I walk up to this gentleman and
I ask him, ``How is this going to negatively affect my credit?
My parents told me about stuff like credit reports before. Is
this going to show up?''
The response is, ``No, you don't even have to accept the
card. All you do is wait until it comes in the mail and just
throw it away. You don't have to call and accept it.'' No one
tells me there is going to be a market on my credit, saying
that I was inquired about.
``Well, what if I really don't want a card at all, can I
still get a sandwich?''
I get a response, ``Well, you need to fill out the form.
But don't worry, you can just throw out the card. You're really
not even applying for a card, you're just giving us your
information so that we can see if we can offer you a card,''
which, if you write that down on paper, seems kind of
contradictory.
These are the things I have a problem with. This happened
for 2 years at the Subway restaurant with Discover. At first, I
thought the problem had been solved, or it had gone away after
U.S. News and World Report had actually interviewed one of my
roommates who got a card in this manner.
Then, just a few months ago, end of April/early May, I am
walking down the same street and a friend of mine comes up to
me and says, ``Hey, Jimmy John's is giving away free
sandwiches. I got this slip from someone on campus.''
Jimmy John's is across the street from Subway. I went ahead
and went into Jimmy John's, and there is a bank of four or five
laptops set up. And so, I ask the exact same questions. And now
it's not for Discover Card. It's for a Chase--I forget if it
was MasterCard or Visa. And I ask the same questions and I get
the same vague responses, I get the same misleading responses.
And that is the part that really upsets me.
And that's what I really have for you, is our story from
UIC. We're an urban college. We have 16,000 undergraduate
students. If I had to take a guess, I would say at least 12,000
of us have credit cards.
And with that said, I wish Mr. Hensarling were still here,
so I could thank him. I would like to take this opportunity to
point out that credit cards are an extremely useful tool for
students.
If not for credit cards, but for access to a credit card,
many of our students couldn't pay for things such as a summer
term of school, which doesn't have much Federal or scholarship
or grant funding available. Many of our students couldn't pay
for things such as rising room and board rates, rising student
fees, and the extraordinarily high cost of college textbooks.
I would also like to point out that, but for access to a
credit card, those same students would not have a 19 percent
interest rate to pay off, while 45 percent of our students
don't even have jobs while they are in college.
But for access to a credit card, those students will not
face higher credit payments for less money advanced to them
than they would on most student loans, even the commercial
student loans.
I would like to take this opportunity to bring everyone's
attention to the fact that this isn't just a credit card
problem, this isn't just a student problem. This is brought
about very specifically because students need to find more
financing for education, and this financing is not available in
the places we would like it to be available.
So, this is a problem that must be faced on many fronts.
But when we start talking specifically about credit cards, I
would wonder where is the business model, what is a credit card
CEO thinking, extending me a credit card when I tell him I have
zero dollars annual income. Where are they anticipating the
revenue to come from? I can only surmise that they anticipate
the revenue to come from a very high interest rate spread
across a very long period of time, which would be the period of
time until which I graduate.
And then, when I graduate, and I look at my career
possibilities, I am going to wonder, well, I could go into
social work, I could be a public high school teacher. I could
start at $35,000 a year, and I could spend 15 years paying off
my student loans and my credit card debt. Or, I could start in
the corporate world at $50,000 a year and get this paid off,
and get this monkey off my back as fast as possible.
Thank you very much for your time.
[The prepared statement of Mr. Thurman can be found on page
86 of the appendix.]
Chairwoman Maloney. Thank you. Thank you for your
testimony.
Kenneth Clayton?
STATEMENT OF KENNETH J. CLAYTON, MANAGING DIRECTOR AND GENERAL
COUNSEL, ABA CARD POLICY COUNCIL, AMERICAN BANKERS ASSOCIATION
Mr. Clayton. Chairwoman Maloney, Ranking Member Biggert,
and members of the subcommittee, my name is Kenneth J. Clayton,
senior vice president and general counsel of the American
Bankers Association Card Policy Council, the group within the
ABA that deals with card issues.
We appreciate the opportunity to appear today to discuss
college students' rights, as adults, to obtain and use credit
cards. We certainly acknowledge that not all students will
manage cards in a responsible way, just as not all adults, in
general, will manage debt without experiencing problems.
Dealing with debt problems at any age can be stressful. And
banks do their best to deal with each individual situation
quickly to help resolve the problem at hand. However, anecdotes
of student problems in the card area fail to paint the real
picture that students, as a broader group, are, in fact,
managing their credit obligations well.
Importantly, we fear that policy decisions made on the
basis of anecdotes will result in the creation of barriers to
credit access that restrict the ability of young, responsible
adults to manage their everyday lives.
In my testimony today, I would like to make four points.
First, credit cards provide invaluable benefits to the adult
student population. They offer an ability to meet day-to-day
needs, from buying books to purchasing airline tickets, in an
enormously convenient and safe fashion. They provide an
unparalleled safety net for emergencies. And they provide an
entry point to the world of credit, allowing students to build
financial skills and a credit history that will one day permit
them to buy a house, get a job, and otherwise participate
productively in everyday life.
Second, as a general matter, the bulk of college students
handle their credit card experiences very responsibly.
According to a 2008 survey by Student Monitor, 65 percent of
student card users pay their balances back in full, monthly.
And for the 35 percent who carry balances, those balances
average out at a mere $452.
These numbers show, as do similar results from previous
studies, that students handle credit as well as, and in some
cases better than, the general adult population. They are also
a reflection of the sound underwriting practices employed by
banks, which typically involve imposing lower available credit
limits, closer monitoring, and other safeguards on these
accounts that result in limiting risk to both the student and
the institution.
Certainly there are examples of students who took on more
debt than they were ultimately able to manage. But in the vast
majority of cases, students are acting responsibly and meeting
their obligations.
Banks have a vested interest in ensuring that the students'
experience is a positive one, as the bank wants to build a
productive, lifelong customer relationship that benefits both
parties.
Third, we believe that prescriptive policy decisions in
this area may create barriers to credit that actually harm
responsible young adults. Congress and several State
legislatures have introduced legislation that would have the
effect of limiting or preventing categories of college students
from obtaining a credit card, whether through arbitrary limits
on available credit or various prerequisites to credit card
access. Today's student population is very diverse, and such
barriers may impede large numbers of responsible individuals
from the enormous day-to-day and emergency benefits that cards
have to offer.
And, finally, we believe that the key to responsible card
use lies not in artificial constraints, but in improvements in
financial education. Most banks that issue credit cards are
engaged in a wide variety of financial literacy and school
education efforts, often in partnership with consumer groups.
And many of these programs include training for young people
using credit for the first time.
ABA has cataloged on our Web site many of the efforts of
our member institutions and groups to provide financial
education to consumers, and I have provided a link to that site
in my written testimony. Much needs to be done in this area,
including improving educational efforts from grades K through
12.
In conclusion, credit cards provide enormous value to young
adults, the vast majority of whom have consistently shown that
they can manage this product responsibly. We believe that
continued efforts to improve financial education, rather than
prescriptive policy decisions, are the best way to benefit this
segment of the adult population.
Thank you for considering our views, and I will be happy to
respond to your questions.
[The prepared statement of Mr. Clayton can be found on page
53 of the appendix.]
Chairwoman Maloney. Thank you very much.
Erica Williams, policy and advocacy manager from Campus
Progress. Thank you.
STATEMENT OF ERICA L. WILLIAMS, POLICY AND ADVOCACY MANAGER,
CAMPUS PROGRESS ACTION
Ms. Williams. Thank you, Chairwoman Maloney, Ranking Member
Biggert, and members of the subcommittee. I am Erica Williams,
the policy and advocacy manager of Campus Progress Action. We
are part of the Center for American Progress Action Fund. And,
along with our sister organization, Campus Progress, we work
very simply to help young people make their voices heard on
issues that matter.
First, let me thank you for the opportunity to testify on
behalf of the young people on over 500 campuses and communities
with whom we work. My testimony this afternoon will reinforce
the points of several of our witnesses today, and will also
seek to convince you of two things: First, that young people,
especially students, are uniquely impacted by credit card debt
and the abusive practices of credit card companies; and second,
that this negative impact can be made better through an
approach with legislative action at its center.
Compared to previous generations, today's young adults have
not only been forced to borrow for their education, but also
for their expenses while in college. As we heard earlier,
according to Nellie Mae, the average undergraduate has over
$2,000 in credit card debt. We hear hundreds of stories and
heard the anecdotes referenced earlier.
And we know that there are thousands of stories like that
of Kali, a graduate of the University of Virginia. She shared
with Campus Progress her experience with credit cards in
college. When asked about the presence of companies on campus
she said, ``They were everywhere, like vultures, outside of my
dorm, at football games, and in the quad. I took their teddy
bears, free pizza, and complicated, convoluted sign-up forms.''
By her junior year, Kali had opened three credit cards, all
on campus, and had incurred nearly $3,000 in debt. Along with
the giveaways and incentives, she took high fees, heavy
interest rate burdens, and complex terms: three credit card
practices that have been proven to heighten the risk of
default. And default she did. As a senior, she graduated with
over $5,000 in credit card debt.
Now, here are the points that we are emphasizing today.
Kali's story is but one of many that we continue to hear from
students, and it illustrates the key challenges that college
students face with regard to credit cards.
First, aggressive marketing and targeting by credit card
companies on campus. They use a variety of techniques, from
buying lists from schools and entering into exclusive marketing
arrangements with universities, to marketing directly to
students through the mail, over the phone, on bulletin boards,
and through on-campus and near-campus tabling facilitated by
so-called free gifts.
The second challenge is high fees, heavy interest rates,
and complex terms. But credit cards are notorious--and credit
companies are notorious--for aggressive marketing and fine
print. So why is the situation particularly damaging for
students? Because young people are in the most vital and
vulnerable point of their financial lives. For college
students, major borrowing from credit card companies is like
visiting a Las Vegas casino. It's a gamble, and the odds are
against you.
According to a 2004 study by Nellie Mae, 76 percent of
undergraduates have credit cards. One fourth of the students
surveyed in U.S. PIRG's 2008 report said that they have paid a
late fee, and 15 percent have paid an over-the-limit fee.
And to be clear, as we have heard earlier, this accumulated
debt is not always the result of irresponsible spending and
late night pizza runs. It is also the result of academic fees
and textbooks. Research has shown that some students even use
their credit cards to pay for their core tuition.
Unfortunately, the result of this necessary use is often
blemishes in the infancy of their credit history that will
haunt them for years. Young adults saddled with credit debt
upon graduation can pay up to $.25 of every dollar they earn
servicing their debt: their credit cards, their student loans,
and other loans.
Entering a job market with stagnant incomes, this
generation--my generation, Generation Debt--can ill afford to
be financially compromised.
This credit card occurred through aggressive campus
marketing impacts our lives, our families, our communities, and
our larger economy.
So, now we know the scope of the problem. But what about
the solution? Students that we work with on campuses every day
will continue their campaigns on the State and campus level to
not allow credit card marketing aggressively on campus, to keep
colleges and universities from sharing students and alumni
lists to credit card marketers, and to improve financial
literacy among young adults.
But Congress has a simple and significant role to play. We
urge Congress to go the extra step and, with young people in
mind, mandate a higher level of fairness in credit card terms
in conditions by banning several of the most abusive, deceptive
credit card practices, those that target students, and
encourage greater transparency.
Legislative action to protect against abuses by credit card
companies is a fundamental issue of fairness and protection of
America's future, young Americans, when they are arguably in
the most vulnerable and important phase of their financial
lives.
Thank you for the opportunity.
[The prepared statement of Ms. Williams can be found on
page 89 of the appendix.]
Chairwoman Maloney. Thank you very much.
And Mr. Neiser, director of strategic programs and
alliances from the National Endowment for Financial Education.
STATEMENT OF BRENT A. NEISER, DIRECTOR OF STRATEGIC PROGRAMS
AND ALLIANCES, NATIONAL ENDOWMENT FOR FINANCIAL EDUCATION
Mr. Neiser. It's great to be here, Chairwoman Maloney,
Ranking Member Biggert, and members of the committee. I want to
extend, from the National Endowment for Financial Education, a
personal thanks to Ranking Member Biggert and Representative
Hinojosa for leading the bipartisan financial literacy caucus.
We are a 501(c)(3) nonprofit foundation based in the Denver
area. For 20 years, our organization has funded and created a
high school program that has trained over 5 million students.
Credit card information is a key part of that; 800,000 students
were trained last year.
And in the college space, we have worked with the NCAA on
sports and credit card issues, and created the first financial
literacy program for the United Negro College Fund, among other
organizations.
Last year we launched Cashcourse.org, which I will explain
in a few minutes, as a way to bring to campuses customized
financial literacy information that colleges and universities
can co-brand.
More people drop out of college for financial reasons than
academic performance, and this is disturbing. Albert Einstein
called compound interest the 8th wonder of the world, and we
are right at that point where it can work for you or against
you.
There is a role for credit in society. But the fog of
overuse of credit, misuse of it, and ignorance of it can cloud
young people, young Americans, of the opportunity that this
body has created in so many areas of defined contribution plans
and IRAs. They have a failure to launch in those areas. And it
may delay their participation for their own retirement security
for 10, 20, or even 30 years. We think there needs to be a
balanced approach in financial education, as a part of that.
I will provide suggestions in five areas very quickly for
you: Financial education; disclosure; defaults; public
awareness; and a culture of commitment.
In the financial education area, Cashcourse.org, since its
launch in January, is a non-commercial free service that we
offer on an institutional subscription basis. One hundred and
twenty-six colleges and universities and community colleges
have signed up already. There are dozens on the waiting list,
evaluating the program for adoption. Cash Course provides
information about the world of work, managing credit, paying
for college, and several other areas important to college life
and financial basics.
We are providing many enhancements as the program
continues, such as seminar materials, marketing, and higher
interactivity through Facebook. I am pleased to say that Brett
Thurman on our panel, in the center, will be teaching at his
campus from this program, using it as a supplement, because the
University of Illinois Chicago is one of the pilot schools.
In the area of disclosure, we believe point of purchase
disclosure is very important. The Federal Reserve in 2009, as a
result of the Bankruptcy Reform Act, is ready to launch its own
unique program that we would have advocated as a legislative
change if it was not already in place. We are very excited
about it.
Finally, Americans of all ages will see on their credit
card statement, when the moment of truth is, when they pay that
bill, if they pay the minimum payment, how long it is going to
take to pay it off and how much more it will cost. We would ask
this committee to monitor that progress, because there are two
alternatives to that, and to keep a sharp eye on how those
results go. This is something we felt has been needed for many
years.
In the area of defaults, this is behavioral finance,
behavioral economics. We all know that--regarding the area of
auto enrollments, we have made tremendous progress in the area
of 401(k) use. Americans need a nudge. They need to be pushed
and gently tugged in the direction of their own self-interest.
We see two areas that could improve again for all
Americans. First, convenience checks. When people sign up for a
credit card, they are not signing up for a check delivery
service. We think that should be an opt-in program. People
should have to say, ``Yes, I want convenience checks,'' that
they should not be sent to them automatically from the banks.
And there is an ID theft issue there as well.
In the area of opt-outs, there is a way that people can
stop most credit card solicitations now through an 800 number
by the Federal Trade Commission. However, there is an
exemption: affiliated sharing agreements. Americans should be
allowed to opt into those if they want, or opt out of those, to
have a full ban on credit card solicitations.
In the area of public awareness, we have seen a lot of
positive direction in the area of credit scores. People are
more aware, even from the commercial sector, of what is at
stake as they use credit.
However, as Representative Hinojosa has called for, many
times we need more information in this area. People need to
know about the 8th wonder of the world, the time value of
money, the good and the bad of it, and how it can be a balanced
approach to live their financial dreams. Working with the Ad
Council, we would encourage this committee to see that, for the
first time in the financial literacy space, the financial
basics of the compounding of interest be addressed.
Finally, the culture of commitment. What do I mean by that?
With Cashcourse.org, and its co-branded effect on campuses, no
longer can a university president or business school dean say,
``I don't have information that is unbiased, non-commercial, or
well-maintained that I can use.'' That is available through
Cashcourse.org. And they should tap into the power of parents
and other sectors of society to make this a financial literacy
priority. Thank you.
[The prepared statement of Mr. Neiser can be found on page
81 of the appendix.]
Chairwoman Maloney. I thank all the panelists for their
testimony. The Chair recognizes herself for 5 minutes.
And first, I would like to ask Mr. Lawsky, what role do you
believe legislation should play in addressing these problems?
You mentioned one that you're working on with Congress, but are
there any other areas that you think are appropriate at this
time?
Mr. Lawsky. Sure. I do think there are certainly some
important areas for the legislature in this. Our investigation
is continuing, and we are still, every day, finding practices
that are troubling. What happened in our student loan
investigation is as we discovered practices that we thought
were fraudulent, misleading, deceptive, or problematic, we
would work to find solutions to them through our codes of
conduct we were developing in our agreements with the banks and
with the schools.
The question then becomes we can only do so much, our
jurisdiction is limited. We are in New York, and New York
alone. Often, when we do settlements with a bank, for example,
it does have extra territorial impacts. But at the end of the
day, as we discover these practices and try to come up with
solutions to them, any systemic solution to them really has to
ultimately come from this body and the Senate.
So, I don't have particular areas I would identify, because
we're still in our investigation of finding them. But certainly
with respect to the marketing practices we're finding with
respect to the exclusive agreements, and some of the provisions
in those exclusive agreements, they are very ripe areas for
legislative fixes.
Chairwoman Maloney. Well, could you publicly talk about
what progress has been made by your office's credit card
marketing code of conduct?
Mr. Lawsky. We are making great progress with the code of
conduct. It is not--it isn't there yet, but again we are--
Chairwoman Maloney. Do you have any recommendations you can
share with us now?
Mr. Lawsky. Not yet, unfortunately. I can say we are
certainly focused on the exclusive arrangements and how to deal
with them.
We are focused also, I should say--and it's in my written
testimony--on how potentially exclusive arrangements aren't
necessarily always a bad thing. If an exclusive arrangement
with a school is done right, and a school does the research
required to find the credit card company that really is best
for students, and really will offer something better for
students than other companies are offering through that
exclusive arrangement, then ultimately, the school--if you flip
it around and you change the market incentives--the school can
become a driver of good practices, and really a gatekeeper for
good practices on campus.
That's what we tried to do with the student loan industry,
and it's something we're working on carefully. And it's tricky,
but we're working on it with our code of conduct on the credit
cards.
Chairwoman Maloney. Thank you.
Mr. Lawsky. Thank you.
Chairwoman Maloney. Mr. Thurman, you mentioned that some
students are graduating with a large amount of debt. What
portion of college students would you estimate change their
career plans after college due to credit card debt?
Mr. Thurman. Well, first, Madam Chairwoman, I would point
out that anything I estimate would specifically just be my
opinion. And I honestly would not feel comfortable giving you a
number.
But I can tell you, as a president of the student
government, our student government is a 25-member assembly, and
these are some of the best and brightest student leaders on our
campus who are elected by every other undergraduate student on
campus. And of those 25, I would say there is not a one who
isn't currently trying to decide, whether it be in the area of
medicine or the area of law or politics, whether to go into,
say, social work or working in a clinic, as opposed to opening
a private practice or becoming a specified heart surgeon, so
that there is more money involved.
And I know specifically at least two of my friends have
already decided that law school is probably the way for them to
go, as opposed to, say, going to work for Greenpeace, or
something like that, following their undergraduate career.
Chairwoman Maloney. You mentioned many students were
turning to credit cards to pay for their tuition and books and
everyday living. Aren't there other options like Pell Grants
that--
Mr. Thurman. Yes.
Chairwoman Maloney. Could you elaborate? And then my time
has expired.
Mr. Thurman. Yes, ma'am, I could. Very briefly, at our
school alone, about one-third of our undergraduate students are
Pell-eligible, so it's a very focused-upon subject. But the
Pell is a very intricate system. You may receive a scholarship
of $500 that, if put into the system incorrectly, would make
you Pell-ineligible. So, receiving a $500 scholarship would
cost you $2,000 in grants.
And, obviously, this is something for a different committee
to hear, but also more and more students are going to summer
school now, because it is very difficult to attain an
undergraduate degree in 4 years. There are very little
financing options available for summer school.
As a matter of fact, if you want federally-subsidized loans
for summer school, it has to come from unused loan amounts from
the previous semester. So credit cards is where that can come
into play to help a student accomplish that goal.
Chairwoman Maloney. The Chair recognizes Mrs. Biggert for 5
minutes.
Mrs. Biggert. Thank you, Madam Chairwoman. It was noted in
the testimony that Mr. Hinojosa and I have worked a lot on
financial literacy, and started out working with the Federal
Government and the agencies, and really wanted to bring this to
work with the private sector, too, to have some accommodation
there.
And Mr. Neiser brought up the Cashcourse, which I would
like--I have to go online to see what's happening there,
because that is very exciting, that you are using that in so
many schools.
I just wondered what some of the other witnesses--Ms.
Lindstrom, are you doing anything on the campus for financial
literacy? I know you said in your testimony that financial
literacy should be enhanced. But is there a way that your
group, PIRG, can help to do that, since you are on--I don't
know how many campuses, but--
Ms. Lindstrom. Sure, yes. Yes, like I mentioned, this
booklet helps students. It's a consumer guide to credit cards,
and we're passing out thousands of those on campuses.
I think what's particularly exciting about our education
effort is that it sort of penetrates all the other advertising
that young people see, and educates them because it's a tongue-
in-cheek effort, where we're looking like a credit card
marketing effort, but we're not.
Mrs. Biggert. But is there any--
Ms. Lindstrom. So, that's the main approach that we are
taking to educate students through our effort.
Mrs. Biggert. But there is nothing, as far as getting into
course work with the universities or anything?
Ms. Lindstrom. Certainly it comes up in our one-on-one
conversations with administrators, when we are discussing, you
know, principles for responsible credit card marketing, and
some things that the campus can do to clean up the marketplace.
But, you know, I think our bottom line is that to increase
financial literacy alone just isn't going to do it. The
marketplace is unfair right now on campus, and the products are
poisonous. So we have been focusing on those aspects.
Mrs. Biggert. I would like to go to Mr. Clayton. Can you
describe some of the efforts that issuers have made to educate
students and young people about responsible credit card use?
Mr. Clayton. Yes. Thank you, Mrs. Biggert, for asking. I
think it's very important, and it's along the line of what Mr.
Scott was talking about, too.
This focus on marketing is kind of looking at it from the
wrong end. You kind of have to flip it around and say, ``Look,
we have to empower people to make choices that work for them,
not make the decisions for them, but help empower them to make
those choices.''
There is a whole range of activities that credit card
companies, consumer groups, and others have been engaging in.
Mr. Neiser has been talking about this, too, of getting out
there and trying to educate people. But I would--
Mrs. Biggert. How do you get out there? Are there any
initiatives with the college administrators or--
Mr. Clayton. Sure.
Mrs. Biggert. Or governments to encourage greater financial
literacy?
Mr. Clayton. Absolutely. I think there are a number of
examples of institutions working specifically with the
universities.
Remember, as was noted before, students in institutions and
colleges and universities work together to figure out what the
right way to present these things are. And institutions will
only act within the bounds of what the college has basically
set out as their criteria for marketing stuff.
I know a number of institutions that actually teach courses
on campus. There are always hand-outs, similar to what we're
talking about here, when people get applications for credit
cards that basically try to educate people on what is going on.
There are a host of resources online.
The bottom line is we have to do more, but I also want to
stress we have to do more even before college. I mean, there
has to be a concerted effort on the part of the States,
institutions, and others to kind of--
Mrs. Biggert. I love the NFL and Visa, the football,
financial football, the way they have done that online.
Mr. Thurman, what do you see that you can do in the student
government to encourage--and do you think that courses should
be offered just on financial literacy, or mandated, or is this
something that maybe--did you have a course in high school or
anything, economics?
Mr. Thurman. No. No, I didn't, Mrs. Biggert. Well, you
asked if I think it should be mandated. I think you could get
me in trouble with my dean. I think the problem--
Mrs. Biggert. I don't believe in mandates, but--
Mr. Thurman. I think the key problem that comes up in
educating students on financial literacy is who is going to do
it, and who is going to be responsible for it?
Mrs. Biggert. Okay.
Mr. Thurman. It does nothing for professors' promotion and
tenure track to add a course of financial literacy to their
course burden, because it doesn't affect their academic scope.
If you are the dean of a college, how are you going to find the
placement for it, in terms of space, the time for it in your
programming, and also the pay for whomever is going to teach
it.
And these are things that possibly could be looked at on a
Federal or more public level, some type of incentivized--or, as
was mentioned before, talking about it in high school, talking
about it before someone signs up for that first set of loans,
before they go into their freshman year, their first credit
card before they go into their freshman year.
Mrs. Biggert. Well, I think that we have had the, you know,
consumer education in high schools, but it doesn't seem to have
really covered this, maybe because I remember it a long time
ago, before we had all those credit cards.
But thank you. I yield back.
Chairwoman Maloney. Mr. Watt for 5 minutes.
Mr. Watt. Thank you, Madam Chairwoman. And let me thank the
Chair for convening this hearing on a topic that I think is
very, very important for us to be dealing with.
There are, obviously, advantages to students for having
credit cards, but there are also some concerns that need to be
addressed. And I want to zero in on three of those, and get Mr.
Clayton's reaction.
The two concerns that I am most focused on are the
aggressive marketing and the issuance of convenience checks
to--I mean, it frustrates me if I get a convenience check that
I didn't request. It seems to be a waste of money for people to
send them to me. I typically throw them in the trash can
immediately. Or, actually, you need to shred them. I worry
about throwing them in the trash can, because they have an
account number on them already.
So, I just want to know--and maybe you have already
addressed this question--on the aggressive marketing side, you
kind of turned the equation and said we shouldn't focus on
that, we should focus on literacy. I am a strong supporter of
financial literacy, but there has to be some limitation on the
aggressiveness of marketing on campuses, and elsewhere, but
particularly to young people. Do you agree or disagree?
Mr. Clayton. I think--well, a couple of things. Let's put
this in some factual context.
Mr. Watt. I don't want you to put it in context, I want you
to tell me whether there are any points beyond which credit
card companies shouldn't go in aggressively marketing to young
people.
Then you can put it in context, if you want. I am not
trying to cut you off, but I only have 5 minutes here.
Mr. Clayton. These are adults, and we understand that. And
we understand that we're in a marketing society, and there are
always going to be aggressive activities on the part to get
noticed. The ultimate determiner--
Mr. Watt. But do you think it's appropriate to--this
example, where--to be giving a Subway coupon, and then getting
there, and you're not getting a sandwich, you're getting a
credit card. Do you think that is an appropriate practice?
Mr. Clayton. I think it's safe to say that Mr. Thurman
didn't get a credit card with that company. I mean, so I think
that--
Mr. Watt. That's not the question I asked, though, Mr.
Clayton. I appreciate you trying to avoid the question. I'm
trying to find out what--whether you think there are some outer
limits to the aggressiveness of credit card marketing to young
people.
Mr. Clayton. There are outer limits that the States and the
Federal Government--
Mr. Watt. And where do you think those outer limits are?
Mr. Clayton. Well, that's an arbitrary standard. I mean,
it's unfair and deceptive acts and practices standards that are
in the laws and in the books, and people get to enforce that.
So, I mean, I can't tell you what line--what chapter and
verse, this is okay and this isn't, because that's--
Mr. Watt. Well, what about convenience checks? What is your
opinion on that?
Mr. Clayton. I am not really prepared to respond at this
point, because we're not really talking--that wasn't
necessarily in the context of the student credit card market,
but I mean--
Mr. Watt. Well, I didn't put it in the discussion,
somebody--
Mr. Neiser. That was me, Mr. Watt.
Mr. Watt. Mr. Neiser put it in the discussion. He said
credit card companies are routinely issuing convenience checks.
It is offensive to me to get a convenience check with my credit
card. I use a credit card to charge things, not to borrow more
money, which is what I can do with a convenience check. I can
borrow money on my credit card. Do you think that is
appropriate?
Mr. Clayton. Well, for some people it is convenient, and
some people use it for valid purposes, and that's their
judgement to make.
As a practical matter, I think you talked about what you
did with it was appropriate. If you don't agree with it, you
throw it out, you shred it. I mean, these are not hard and
difficult standards for people--
Mr. Watt. What happens if I throw it in a trash can and
somebody else picks it up and uses it. Does the industry
protect against that? I didn't want it, in the first place.
Mr. Clayton. Yypically, the industry does protect against
people who are subject to fraud. I mean, as you can see, as you
have seen in the credit card market generally--
Mr. Watt. All right. My time has expired. Let me just ask
Mr. Thurman one thing quickly, Madam Chairwoman.
Are students aggressively taking action against college
administrators who are issuing student lists? I mean, that
seems to me--I guess if I were a credit card company, I would
want the list of all the students. That is a college failing.
What are we doing about that, if anything?
Mr. Thurman. Well, Mr. Watt, I would point out, first of
all, that our university, the University of Illinois Chicago
does not participate in that kind of practice. So our students
don't have a reason to take aggressive action against the
administrator.
But perhaps Ms. Lindstrom might be able to give you some
information about what is happening on other campuses.
Ms. Lindstrom. Sure, yes. What we found is that in quite a
few States, the public university system feels a compulsion,
under disclosure of public records law, to have to give up all
of the current information of students on campus to almost
anybody who asks for it, for free or for a nominal fee.
And so, ultimately--that's just getting into a different
area, but the practice actually is occurring in a set of
States, and doesn't occur in other States because of public
records law.
So, what we are--one of the suggestions that we made
earlier is that students be allowed to opt in or opt out, know
that is going to happen with their name, so that they have some
control, again, over how they might be marketed to. But it is
an interesting State law issue in quite a few places.
Mr. Watt. Thank you, Madam Chairwoman. I yield back.
Chairwoman Maloney. Your time has expired. Mr. Castle?
Mr. Castle. Thank you, Madam Chairwoman. Mr. Clayton, on
page five of your testimony, there are several rather
interesting statistics which are: 41 percent of college
students have a credit card, which surprised me, I thought it
would be higher; of the students with credit cards, about 65
percent pay their bills in full every month, which is higher
than the general adult population; among the 35 percent who do
not pay their balances in full every month, the average balance
is $452, which is down 19 percent from 2007; and 74 percent of
monthly college spending is with cash and debit cards, only 7
percent is with credit cards.
Mr. Neiser, on the first or second page of your written
testimony, you indicate that the undergraduates of today leave
campus with $19,000 in student loans. Student loans are a whole
different issue.
Mr. Neiser. Right.
Mr. Castle. I happen to be on that committee as well, which
is a whole problem, I might add.
``On top of that, half of all graduates in 2004 use credit
cards for school expenses, carrying an average balance of
$3,900.'' There seems to me to be an inconsistency in those two
sets of numbers. Maybe there is not. Maybe one or both of you
could explain how you came up with those numbers, or what the
consistencies or the inconsistencies are.
Mr. Clayton. Well, I would be glad to jump in first, and
then turn it over. As a practical matter, this is a study from
Student Monitor from 2008, a survey of students and what their
experience has been, and so that is where that number comes
from.
I would note, though, that the results are relatively
consistent with prior studies. I was actually surprised at the
41 percent too, because I think it's actually probably higher.
But there have been other surveys that the GAO has done back in
2001, that Professors Barron and Staten have done in 2004, that
yield consistent numbers in terms of the extent of debt that is
out there, the amount of people who are essentially paying back
in full every month.
And so, I do think that, you know, it is--we feel
comfortable saying to you that debts are within reasonable
limits. And, frankly, it's also a product of the marketing.
Credit card companies don't give students open checks here.
They don't just sit there and say, ``Take a $10,000 balance.''
They start them off slow, they work them through it, and see if
they're capable of handling--
Mr. Castle. Well, just to follow up, I mean, Mr. Neiser's
testimony indicates the average balance is $3,900 when they
graduate. And the suggestion here is that the average balance
is $452 for those students who don't pay their balances in full
every month, which I imagine is the ones with the higher debt,
I guess. Those are dramatically different numbers.
Mr. Clayton. It was--and I don't know of the number Mr.
Neiser was talking about--was the average balance of a
graduating student, and there is a range of things--I will
defer.
Mr. Neiser. In our testimony, it is half of all graduates
carried that debt, and it was--the average balance of those
half was $3,900, according to the American Council of
Education, June 2005. So it's not all students. The half who
carry that--have that average balance.
Mr. Castle. Well, I understand that. But you are talking
about 35 percent here, and a half there, and you're talking
about vast differences. I think, somehow or another, we, as a
committee, need to get those figures straightened out, because
they don't seem to be quite consistent with one another.
Mr. Lawsky, let me ask you a question. You indicated when
you testified that the agreements between the credit card
companies and the schools, when revealed, will shock us. And
then you went on to say that the colleges allow the credit card
companies to get addresses, other information, access, etc. Is
that the shocking information, or is there something you can't
testify to now, because of your legal position, that will be
shocking that we don't know about yet?
Mr. Lawsky. The latter.
Mr. Castle. So there are things that will be revealed,
hopefully, at some point later. Is that correct?
Mr. Lawsky. Yes, sir.
Mr. Castle. To--perhaps, Mr. Lawsky, and perhaps to Mr.
Clayton or anyone else who wants to answer it, with respect to
what the colleges are doing, and with respect to the
information about the different students and that which is
given out to the credit card companies, what is the
relationship between the credit card companies and the
colleges?
It almost sounds to me as if, in certain instances, the
colleges have a responsibility here, in terms of their
administration, as opposed to just the credit card companies
and the students, in terms of what information is allowed to be
shared. What is being done by the credit card companies with
controlling that information, and what, if anything, are the
college and university administrations doing to make sure that
that may be brought under control, if that is a problem, if you
know?
Mr. Lawsky. You're asking about the flow of information
from the universities about students to the companies?
Mr. Castle. I'm talking about the flow of information from
the colleges or universities to the credit card companies,
which I believe you testified was a problem. Is that issue
being addressed, either by the credit card companies or by the
colleges themselves?
Mr. Lawsky. I'm not sure I--I don't think I know the answer
to that, and maybe Mr. Clayton does. I can tell you that the--
there is, in the relationship between the universities and the
credit card companies, there is clearly a money flow from the
credit card companies to the universities in exchange, at least
in part, for student data: e-mail addresses, home addresses,
school addresses, and telephone numbers, to allow the
marketing.
The information I have seen indicates that is just a
financial give-and-take. I didn't see protections built in
there. Maybe they are aware, and I am not aware of them. But to
my knowledge, it is simply an economic transaction.
Mr. Castle. Well, I understand what you have testified. My
question is, is that a problem? Is anyone doing anything about
it, if it is a problem?
Mr. Clayton. Well, I think that Mr. Lawsky referenced it
earlier, that colleges can act as a gatekeeper, and they get to
control this relationship, and they have to determine what is
in the best interest of their students.
I am not privy to the specific agreements, in terms of what
is shared by both sides, but you really want to turn to the
universities, the ones that are getting into endorsing these
products. And if they don't think something is appropriate,
just like I understand they did at the University of Illinois,
they say no. And that's the gatekeeper.
Mr. Castle. Thank you.
Chairwoman Maloney. Will the gentleman--
Mr. Castle. Thank you, Madam Chairwoman.
Chairwoman Maloney. In response to one of your questions on
the statistics, the Nellie Mae survey for 2007 will come out in
July, and the Fed survey for 2008 will come out in August.
The Chair recognizes Mr. Clay for 5 minutes.
Mr. Clay. Thank you so much, Madam Chairwoman. Mr. Clayton,
in the beginning of your testimony, you state that not all
students will manage debt in a responsible way, just as not
adults in general will manage debt without experiencing
problems.
Aside from being a vague statement, you fail to recognize
that most adults are receiving an income each month, whereas
many college students who, yes, are considered legal adults,
are unemployed, or have low-paying part-time jobs.
As you are supporting the marketing of credit cards to
college students, how do you suggest we address the issue that
the majority of students do not have the money to pay off their
debt on time, and therefore, are finding themselves in immense
amounts of debt upon graduation? Oftentimes the offering of
credit cards to students is a lure to indebtedness, as they
view credit cards as money and use them as such.
When you know that this is the end result, it seems to be
pretty predatory in nature when the offer is made to these
individuals--
Mr. Clayton. Let me make sure--there seems to be some
discrepancy in the numbers, and we recognize that. And to us,
it says that more needs to be done to figure out what is really
going on out there.
I mean, we take the perspective, from the numbers we have
seen, that this predatory lending that you're talking about
doesn't really exist, and that, in fact, a good portion of
students are acting in a responsible way in handling that
credit, and it is opening doors to them.
Remember, the thing we haven't really talked about is how
this has helped them build a credit record that helps them get
a car loan or a home loan and be productive members of society,
as they get out of college. But we're not seeing the same
message.
We are seeing--again, we operate in the college space with
much more confined underwriting. We limit the amount of credit
that a student can take down, as a practical matter, and the
results, from our perspective, speak for themselves.
I would note also there has been a lot of discussion about
this massive marketing. This is a--we are--obviously, there is
a lot of information flow in this society, and there is no way
to really necessarily contain that information flow. It's going
to come from various places.
But one of the things that people are talking to us about
is how little or few students actually sign up for these on-
campus marketing techniques. Now, they obviously view it as
productive to do, to get their names out there. And oftentimes,
frankly, they market at sporting events because they're really
shooting at the alumni, and the friends of alumni, not
necessarily the students.
But just one aside, the Student Monitor came back and said
that only 2 percent of credit cards that students actually
obtain is through these campus marketing activities.
So, I guess what I am trying to say is we are not really
starting with the same premise, that these aren't necessarily
predatory, that they are opportunities. And I think others have
recognized this is a real value to people who need money. To
the extent that there are broader societal issues brought to
bear here, such as the impact of student loans, that's clearly
a case.
I would say that, just as an aside, when we looked at the
Student Monitor study and what they talked about, the amount of
credit card debt versus the amount of student loans, student
credit card debt represents less than one quarter of one
percent of overall student loans, in terms of the debt that
that is--
Mr. Clay. All right, thank you for the response. Ms.
Williams, in your testimony you mentioned several times how
young adults are more frequently using their credit cards to
pay for basic school expenses, such as tuition and books,
citing research done by U.S. PIRG.
If credit cards are issued to students who are inclined to
pay for school expenses in this manner, then do you agree that,
by using the credit card, students are paying almost
exponentially more interest than by using student loans? Do you
agree?
Ms. Williams. The question is that do I agree that, by
using the credit cards to purchase--
Mr. Clay. Students are paying exponentially more interest,
more in interest rates?
Ms. Williams. Absolutely.
Mr. Clay. Okay.
Ms. Williams. I mean, the interest rates for students are
considerably higher because of their thin credit history. So if
you look at that comparatively to student loans, yes, I do
agree with that statement.
Mr. Clay. Is the ease of obtaining credit card financing
creating greater debt for these prospective professionals?
Ms. Williams. It is, and I think that's getting to the
heart of what some other witnesses--Mr. Thurman and Ms.
Lindstrom--are suggesting. It is not a matter of denying access
to the cards. I wouldn't even necessarily say it is the ease
with which they have access. But, again, it's the predatory
nature of this kind of aggressive marketing on campus.
And we are talking about, you know, young adults. They are,
indeed, adults. But this is, in a way, the childhood of their
financial life.
Mr. Clay. Sure. And shouldn't we be about creating less
debt and less hurdles for young people who are coming out of
college?
Ms. Williams. Absolutely. I mean, the impacts, again, are
not just on the students themselves, but on their lives, on
their families. We mentioned that the boomerang effect of young
Americans having to move back home, we mentioned--Mr. Thurman
mentioned some of the impacts on the economy and job choice.
I think it is an overall broader societal issue than just
simply incubated on that campus.
Mr. Clay. Thank you so much for your response. I yield
back.
Chairwoman Maloney. Thank you. The Chair recognizes Ruben
Hinojosa, chair of the Higher Education Subcommittee, which
also is reviewing this challenge, and co-chair of the financial
literacy caucus.
Mr. Hinojosa. Thank you very much, Madam Chairwoman. I want
to thank Chairwoman Maloney, and I want to thank Ranking Member
Judy Biggert. I thank them for holding this extremely important
hearing today on a subject that is very near and dear to my
heart, and that is ensuring that higher education is available
and affordable to as many students as possible.
Chairwoman Maloney, I am proud to be a cosponsor of your
legislation, H.R. 5422, entitled, ``The Credit Cardholders'
Bill of Rights Act,'' and I was more than willing to cosign the
letter to Federal regulators in support of the proposed rule to
ban unfair or deceptive credit card practices.
As chairman of the Subcommittee on Higher Education, I am
very concerned that more than 100,000 students each year do not
enroll in higher education institutions because of financial
barriers. I am equally concerned about the amount of debt that
students are incurring while attending institutions of higher
education. And I have been working diligently to make college
more affordable and ensure that students graduate with the
least amount of debt possible, including credit card debt.
At this point, Madam Chairwoman, I wish to ask for
unanimous consent to submit for the record three documents that
I have with me. The first one is my complete statement, which
is much longer than this condensed statement that I have just
made.
Secondly, I would like to ask unanimous consent that a
report by U.S. PIRG, entitled, ``The Campus Credit Card Trap,''
and that acronym stands for a survey of college students and
credit card marketing by the U.S. Public Interest Research
Group Education Fund, and this report is dated March 2008.
And lastly, I would like to ask unanimous consent that the
report that was released, a press release from House Education
and Labor Committee Chairman George Miller on the FTC's new
consumer guide on student lenders' deceptive marketing
practices, and a copy of that guide, entitled, ``FTC Facts for
Consumers: Student Loans and Avoiding Deceptive Offers.''
Chairwoman Maloney. Without objection, it is so ordered.
Mr. Hinojosa. Thank you.
Chairwoman Maloney, I again applaud you for your
legislation and letter--and your dedication to this cause.
And I wish to take this opportunity, since I still have
part of my 5 minutes, to ask some questions. I apologize that I
am a little bit late and didn't get to hear the witnesses make
their presentations, because I was at an event where I
introduced some very important people, including Senator
Clinton, and that made me a bit late.
I know that this young man, as one of the witnesses, was
testifying about his experiences on the college campus in
Illinois, and I was delighted, because that opened, then, the
door for me to talk about the need for the financial literacy
education programs that are available, and mandated in some
States like my own State of Texas. And that, of course, would
help them be prepared to go to college and better handle debt
as they start their college education.
Can you tell me if there are any other States that are
requiring this? Maybe students who came to your campus that had
already taken those courses back in their sending State?
Mr. Thurman. Sir, on the level of States requiring that, I
don't have that information. Perhaps one of the other panelists
might. My area of expertise is very much limited to the
University of Illinois at Chicago. I do know that we have
started developing a program for our students, but in terms of
State requirements, I don't have that information.
Mr. Hinojosa. Well, the strength of the student body that
you represent, possibly you all could start a movement
throughout the Nation. There are several States, according to a
note that was just given to me by staff, that already include a
class on financial literacy as part of the core curriculum.
Texas is one such State.
And possibly that might help Judy Biggert, my friend from
Illinois, who is the co-chair of a caucus that is working with
about 87 other Members to try to get this program out into the
country, and particularly to students who are looking for
accessibility and affordability to higher education.
But I think I will then go on to ask another gentleman who
is on this panel, and I will ask one question, Madam
Chairwoman, of Kenneth Clayton, managing director of the ABA
Card Policy Council.
I have had several representatives from organizations like
yours coming to visit my office and talk to not only me, but my
staff, trying to tell me that they have mended their ways and
that they have fixed things up to where they are no longer
charging for things that I was upset about, and that is that if
they are late in making their payment, that you can easily take
the rate at which they started out using their card, and bump
it up to as high as 28 percent plus late payment fees and other
fees that just make it almost impossible for them to ever get
out of debt.
What is your organization and your members doing to
discontinue that?
Mr. Clayton. I think, as you have seen, there are choices
in the marketplace where various participants have either
decided not to make these products--these type of rules
applicable to their products or not.
I mean, so consumers can say, ``I don't want this, and I am
going to go get this card,'' or not. They are very--there are a
number of institutions that market very simple-termed cards,
and I won't--I can't get into a marketing campaign for them
here, but the bottom line is they have various products out
there for people that want to have these things limited.
I think the other thing I want to stress here is, as you
know, the Federal Reserve has moved in this space in a dramatic
way, and I think most people have recognized that it is a very
broad proposal that they put out to address some of the
concerns that have been raised in this committee to the credit
of Ms. Maloney and others, and they're looking very seriously
at it.
We have some concerns with those proposals, because we
think they have the net effect of driving up costs to a wide
variety of people, and end up unfairly having people that pose
higher risk actually be subsidized by those that don't pose
risk at all.
But that being said, there is going to be a lot of
addressing of these issues that people are talking about. The
Fed will act and it will apply a standard that everyone is
going to have to--
Mr. Hinojosa. With all due respect to you with your title
of managing director, I will say that I receive two to three
applications for credit cards. And to this day, in the last 10
years, I have not received one from those companies that have
simple, easy credit terms like you just described. All of them
have little fine print at the bottom, that if I'm late, if I'm
this, that and the other, I will get penalized, I will have
late payment fees.
So, evidently Congress is going to have to step in and just
make it universal, so that all of the companies will have to
change--
Chairwoman Maloney. I thank the gentleman for his comments,
and your time has expired.
Mr. Hinojosa. Thank you, Madam Chairwoman.
Chairwoman Maloney. You made many important points.
Congressman Scott for 5 minutes.
Mr. Scott. Thank you very much, Madam Chairwoman. It is a
very good hearing.
Let's talk very specifically about what we can do, as a
Congress, what kind of legislation we can put forward.
What we have here is a captive audience of young students
on a campus. They are at a very vulnerable part of their lives.
The testimony is very effective. Let's start with the number
one question.
Number one, would you favor legislation that would ban this
activity? There is documented evidence that there is agreement
between many of these universities and credit card companies,
of which these universities are paid huge sums of money for the
right to market their credit cards to their students. Would you
favor legislation to ban that?
[No response]
Mr. Scott. Any--hurry up, my time is ticking, and I have
quite a few more--I am trying to get at some issues here. I
mean, if you want us to do something, this is something we can
do. Is this something we should do?
Ms. Lindstrom. Sure. Yes. I think I am excited to see what
the attorney general in New York--what their investigation
turns up, in terms of the relationships. And I do think there
should be accountability, once we know what actual relationship
exists.
I think right now some of the things that we're
particularly interested in, in terms of legislation to clean up
the campus marketplace are the same underwriting standards for
students as the rest of consumers in society. So, as we
mentioned earlier, there are lax standards. And, as a result,
students don't need to meet the same criteria, and they get--
Mr. Scott. Well, so let me just ask this, because my
chairwoman is going to put the hammer down on me.
I just want to know is it okay--I mean, is it fine--that
these card companies can come pay these universities money to
have the right to come in and market their product to their
kids? Because this is an industry. They are already doing it at
a tune of $1 billion a year. I mean, we heard a lot of
complaints here. Once they get the right to get on campus to do
it, this is capitalism. They paid the right to have access to
those kids.
Ms. Lindstrom. Right.
Mr. Scott. Do we stop that at the gate? Do we stop the
folks at the gate and don't let them get on the campus? That's
what I am asking.
Mr. Thurman. Mr. Scott, if I may? I would suggest the
answer to that is yes, and I would suggest that based upon a
couple of simple premises.
First, in some university environments, especially in rural
campus environments, what you have is an extraordinarily
captive audience. And if the university is going to sign some
type of exclusivity agreement--and I do believe that's what
we're talking about--that's only going to allow a particular
company access to those students, we're not just talking about
those students just drinking Coke instead of Pepsi. We are
talking about those students having access to only one set of
terms of interest rates, of payback terms, of late fees, of
overdraft fees. And for that simple reason, for starters,
before we get into anything else, I would suggest that that is
a reason alone to ban exclusivity agreements on campus.
Mr. Clayton. Mr. Scott, I guess we would have to oppose it.
I mean, we really do think that, in many instances, schools--
and I think Mr. Lawsky actually talked about it--schools
actually can get benefit from this to benefit the students that
they're actually serving.
I would also note that whether you're in city areas or
rural areas, we are in a very open-ended communication society.
You can get access to information on the Internet, wherever
you're sitting. So you can get it from your local bank, you can
get it from other places. Regardless of what arrangements a
college makes with an institution, it's not the exclusive way
to gain access to students.
Mr. Scott. But I think the point we would make is you
listen to the young people and what they're saying--and there
is some victimization that is truly going on here with the
credit card companies--combined with the lack of the literacy
in education, they are just sitting there.
And the other thing is, okay, once we get them on campus--
and so we have a tie here, we have a draw here, 50/50, some say
they should--but if they get on campus, and then the next thing
they're giving these gifts, and the data says that three-
fourths of all students that come and get the gift fill out the
application. There is a real strategy here. You feel a role of
responsibility. You're going to take the teddy bear, okay,
``You take my teddy bear, you have to fill out the
application.'' You fill out the application, it's gone.
So, should we pass legislation to ban giving of gifts?
Mr. Clayton. Let me just jump in for a second. First of
all, when we talk to institutions, they basically tell us that
the primary vehicle for them signing up people with card
agreements is when those people come into the bank branches and
open up savings and checking accounts.
We think it is overstated that these gifts are necessarily
driving consumers to take on a great deal of debt. I mean, you
know, I don't think that gives enough credit--no pun intended--
to the students and the--
Mr. Scott. Mr. Clayton, the PIRG survey I am reading from
here reported that three of four students--three out of every
four students--reported stopping at tables to consider or apply
for credit cards when they were offered gifts.
Now, there is a direct correlation here, and we're trying
to get at that. If we do let you on the campuses, then the
issue becomes you are giving these gifts. The kids there feel
an obligation to fill out the form. Once they do that, they are
hooked into it. So it is a system that is going on here.
Universities need to wake up. I think they have a
responsibility here. If they are signing these exclusive
agreements, they are giving carte blanche to turn their kids
loose to people when they come in. And this is a business. This
is the American way. They are going to be aggressive with their
tactics. Once they pay the university, the university turns
them loose on the kids. Then they come and they give the kids
gifts. Then they're paying the kids. I mean, this is a little
system here, and I am just simply saying we need to look, and
take a look at some of the deceptive practices.
My final point is that I wanted to get at is--because my
time is up here--would you support legislation for parental--
would you support Federal legislation that requires that,
before the kid can get the credit card, that he has to have a
cosign with his parent or a guardian?
Chairwoman Maloney. Answer quickly, because the gentleman's
time has expired.
Ms. Lindstrom. We would support students being subject to
the same underwriting standards. So that means that if the
student has no income or other assets, then yes, I think maybe
considering the formation or encouraging a starter card for
students who have no income, or allowing them to get a card
with a cosigner makes sense.
But I do think that students should be treated like
everybody else. And the vast majority of students do have an
income, and do have a job, and should be able to get credit and
have a credit check, just like everybody else, relative to the
credit that they qualify for.
Chairwoman Maloney. Thank you.
Mr. Scott. Thank you.
Chairwoman Maloney. The gentleman's time has expired. And
Congressman Cleaver--
Mr. Cleaver. Thank you, Madam Chairwoman. I want to follow
with Mr. Scott's questions.
Mr. Clayton, do you disagree that some of the practices
that we are discussing here today are very similar to the
practices that led to the current subprime crisis with the 1.3
foreclosures as of today, a predicted 6.5 in the next 5 years?
Do you believe that there are any parallels?
Mr. Clayton. I do not.
Mr. Cleaver. Okay. So, is there a parallel between giving
people credit for homes that they can't pay for, and giving
people credit cards that they can't pay for? Do they sound
similar?
Mr. Clayton. No, I don't agree with that, either, because
what we're seeing statistically is that they can pay for it.
Mr. Cleaver. That's what the people said when they gave the
people the subprime loans, almost the exact words. That's the
same logic they use. And we are having 20,000 foreclosures a
week.
So you think such legislation is fake?
Mr. Clayton. I'm sorry?
Mr. Cleaver. Fake, f-a-k-e.
Mr. Clayton. And that is fake in what respect? I mean,
the--
Mr. Cleaver. On page 7, you said that this is artificial,
and a synonym for artificial is fake, bogus.
Mr. Clayton. We think that artificial constraints will have
the effect of limiting the ability of very responsible adults
to get access to credit that they use for very valid reasons.
Mr. Cleaver. Okay, so you believe that if we required that
students who don't have a job receive a credit card, as Ms.
Lindstrom has said, in the same way that other individuals are
marketed--in other words, if they don't have credit, they don't
get a credit card, and if they want a credit card, someone must
sign for them, just like a car, if you don't have a job and you
want a car, your parents have to cosign for you.
Mr. Clayton. Not everybody has a parent who is either
willing or able to sign for it. And so you're ending up taking
those people out of the marketplace.
Mr. Cleaver. Well--
Mr. Clayton. That's a judgement that you make, and I
understand that, and that's certainly the prerogative of the
Congress.
Mr. Cleaver. Yes, the legislation says a parent or an
adult, anyone who is willing to cosign.
Mr. Clayton. But there may be adults who don't have that--
Mr. Cleaver. That is absolutely true. And that is why we
have the subprime crisis, because people were getting things,
and they had no back-up, they had insufficient income. The
figure that has been used about the number, the debt, comes
from the Nellie Mae Corporation study. And if people are
leaving college with almost $3,000 worth of debt and no job,
doesn't that sound like we have a problem?
Mr. Clayton. The numbers are nowhere near what you're
talking about in the subprime crisis, as you know. And the
Nellie--
Mr. Cleaver. I beg your pardon?
Mr. Clayton. The actual dollar numbers that you're talking
about in the credit card space is much less than what you're
talking about in the--
Mr. Cleaver. So it's not--we shouldn't be concerned if
people don't lose homes, they just start out in their adult
life broke.
Mr. Clayton. We're not saying you shouldn't be concerned.
We should be concerned. We are saying that some of the remedies
will create greater problems than the problems that actually
exist.
Mr. Cleaver. Tell me the problem created by requiring a
cosigner.
Mr. Clayton. All I can do is respond from the perspective
of someone who may not have a consignor to make that. They will
not have the benefit of a card to take care of a car that
breaks down, or to buy books.
It's not that we're saying that credit cards should be your
first choice to buy--to use to purchase books. That's a deeper
issue of whether the funds are available to make those
purchases.
Mr. Cleaver. Oh, you--I mean, your job is just to give them
the credit card.
Mr. Clayton. We find that our job is to allow consumers to
benefit and actually get--
Mr. Cleaver. So you're doing them a favor. I mean, you're
providing a service.
Mr. Clayton. Lots of people would tell you that we are.
Mr. Cleaver. Now, you talked about the Federal Reserve. And
they are, in fact, working on regulations. But we do--we both--
you and I will agree that is not a law.
Mr. Clayton. That is correct. But it is a basis of a law
that Congress passed previously.
Mr. Cleaver. You would prefer to have the Fed draft
regulations than have us put a law in place?
Mr. Clayton. Laws end up imposing very restrictive
solutions on things that--
Mr. Cleaver. That's the point of laws. We put a stop sign,
we want to restrict you from driving through. That is what laws
do.
Mr. Clayton. I understand. And it is your prerogative.
Mr. Cleaver. We are trying to keep people from running
people into debt, young people getting a start. I mean, this
Nation is -.6 in savings, -.6. Asian nations are almost 20
percent savings. They're trying to stop people from saving so
much of their income in Japan.
The -.6 means we're going the other way. We ought to be
trying to work with laws and whatever else we can do to prevent
this from becoming another crisis. Sir?
Mr. Clayton. The--
Mr. Cleaver. I disagree. Let me ask you, Ms. Lindstrom, do
you think most of the students on campus understand universal
default?
Ms. Lindstrom. No, I don't think they understand--
Chairwoman Maloney. The gentleman's time has expired, and I
thank him for his questioning.
The Chair recognizes Walter Jones, from the great State of
North Carolina.
Mr. Jones. Thank you, Madam Chairwoman, and we are so proud
of you, because you were born in North Carolina. So we thank
you for remembering your roots by welcoming me.
I want to thank you. I don't know if anyone--I had to be
out for a few minutes--has anybody mentioned the parents who
have to pay some of these charges in your testimony?
Mr. Cleaver. I tried.
Mr. Jones. Oh, you did? Okay.
Mr. Cleaver. I tried.
Mr. Jones. All right. Well, I apologize, because I missed
your--the reason I ask that, and I do know my colleague has
been one of those parents, but this is one of the issues that I
have had--I'm not going to exaggerate, but I will say in 14
years, I have had many concerns and complaints from parents.
And you have touched, in your testimony--and I thank each
and every one of you for your testimony--you have touched on
the fact that too many times these universities are being paid
to send a person's name so they can send a card to that
individual. I think that's going to be addressed, I hope, in
this legislation, or will be addressed. I think it is wrong.
Not only do I think it is wrong for the student, but I think it
is terribly wrong for the parent if that student is 18, 19, or
20 years of age, or maybe even older.
Maybe, Ms. Lindstrom, you might be the one to answer this
question. I had the staff very kindly help me with profits by
the credit cards. I want to read this, and then I will zero in
on my question.
``The credit card industry is the most profitable one in
the United States, with annual earnings in the $30 billion
range. Many people might be surprised to learn that a single
credit card issuer, MBNA, earned 1.5 times more profit than
McDonald's in 2004. Citibank, another major credit card issuer,
earns more profit than both Microsoft and Wal-Mart.''
How much of the $30 billion, what percentage in--would you
say is targeted and percentage comes from students who use
their credit card?
Ms. Lindstrom. Yes, I actually don't know the answer to
that question. I will have to get back to you on that. I don't
know the breakdown of the profit--
Mr. Jones. How about Mr. Clayton?
Ms. Lindstrom. --and what sector it comes from.
Mr. Clayton. I don't have that information. I would also
note that a lot of card companies actually have students that
get their cards that are not marketed to students, they're just
part of general marketing efforts. So they may not be able to
identify if they're students.
But I suspect it's still a relatively small number, as a
percentage of the overall profit.
Mr. Jones. Would anyone want to guess? Is it 1 percent or 2
percent?
I--just to see this--and I realize that when you are
zeroing in on these young people, the hope is that they will be
a user of that card for years to come. I realize it doesn't
just stop when they graduate from college. But I wonder if
there is anyone that--to me, you're putting a tremendous amount
of money into a marketing effort, and you are zeroing in, and I
realize that's not just for the short term, it's for the long
term.
Would anybody be able to respond to the point I am trying
to make, or the amount of money that you are going to--of the
$30 billion, you can't tell me that 1 percent of that $30
billion--and I understand if you can't--is coming from the
college effort?
Ms. Lindstrom. Well, yes. I mean, I would respond with the
fact that what we're talking about here is a captive market and
a highly desirable market that the industry is clearly going
after in a very concerted way. They want to become the very
first card ever in somebody's wallet, because, you know, I
guess marketing studies have shown that folks develop some kind
of sympathy or just get used to that particular card.
And so, you're more likely to get a customer for life if
you can be the very first card that gets into somebody's
wallet. So, I do think what you're talking about is correct.
The investment in getting at students is all about the long-
term pay-off, regardless of whether or not, you know, there is
a--one percent of the overall profit margin comes from the
particular student consumer right now. I think the push to get
into the wallet is what creates the dirty marketplace, as it
were, that exists on the college campuses for students.
Mr. Jones. And the student is charged the same percentages,
late fees, just like a person 30 years old or 40 years old? I
mean, there is no break for the student?
Ms. Lindstrom. No. I mean, again, we only have anecdotal
information. But we do know from our student constituency that
students do encounter worse terms and conditions than it seems
like their parents would, for instance.
So, a 9 percent teaser rate that you get, an interest rate
for 6 months, that then jumps up to 29 percent. Or, you were
late on a payment, and then you--or something along those
lines. We have actually gotten reports, students reporting in,
that they are paying an interest rate of 38 or 39 percent. So,
again, this is all anecdotal. We don't have any real
information to back up that, but we have a sense that the terms
and conditions are particularly filled with the ``gotcha fees''
in a way that is not necessarily the same case for the broader
consumer marketplace.
Mr. Jones. Thank you. Thank you, Madam Chairwoman.
Chairwoman Maloney. Thank you. In the spirit of
bipartisanship, there will be two additional questions, one
from Mr. Scott and one by Mrs. Biggert.
And I am told we will be called for a vote shortly. So, Mr.
Scott?
Mr. Scott. Yes. Thank you very much. Just very quickly--and
I appreciate the generosity of our chairwoman--because I think
that you made a statement there that we treat these the same as
we would adults.
But that is not fair. The adult has a job. They have a
house. They have started in life, they are there. These are
young people, just starting out. There ought to be more of a
nurturing and a caring as you're starting them out on this
journey.
I firmly believe we have to do something about turning over
these exclusive rights at these universities, who are getting
billions of dollars to make available these students. We have
to do something about the enticements being used to attract the
vulnerable student. This is a business that is not just with a
product. They make their money--credit cards make their money
on late fees, penalty fees, interest rates, and compounding
interest rates.
My question, just to give an example, is that even right
now, why could we not--would it be possible, would you support
us making sure that, even as we move forward, that we ensure
that the full amount of a payment is listed in the payment box,
as opposed to, say, the small minimum payment that is there? If
we do that, I think it would help encourage the student to pay
off more of his debt, or pay in full each month, if we show the
full amount that is there.
My point is, by only making minimum payments, let's say, on
a $5,000 balance, that can lead a debt to a debt that would
take, just that small amount, 7 to 15 years to pay off. These
just are small things that I think we need to do. And I fall
down on the side that we need to do and go the extra mile for
these students. They are not the same as adults out here. And
we need to do something about the university.
But my point is, is that possible for us to do, just set
one simple thing so that we could cut down on the amount by
putting the full payment in there? Yes, sir?
Mr. Neiser. Mr. Scott, any time that Americans can be faced
with the brutal facts of what they're spending, and the
potential consequences of not paying things off, is an
educational and a teachable moment. And the same thing has to
happen on the savings and investment side. It's disclosure,
it's what economists say is--it's the moment of truth. And we
can't have information in the shadows to cause people to find,
10 year later, that they made a mistake.
And again, as my testimony indicates, the Federal Reserve
regulations coming forth in 2009 to disclose more of what that
hard, brutal truth is to Americans is encouraging. But it needs
monitoring.
Mr. Scott. Okay. So you agree with that?
Mr. Neiser. Yes.
Mr. Scott. Good.
Mr. Neiser. In general concept.
Mr. Scott. Thank you. Now, the one other point that I
wanted to ask was that--what if we had a way in which the--am I
okay?
Chairwoman Maloney. Sure.
Mr. Scott. All right, thank you.
Chairwoman Maloney. This is the last question.
Mr. Scott. Last question. See, because we need to help the
students here.
If we require a monitoring, if you don't want to go with my
plan for the cosigner of the parent, because you have to have
the parents in here, they don't know. Kids are up there, it's
free money. I mean, we're in a credit conscious world here.
But what if we put a requirement in that, on a certain
periodic basis, that there must be a monitoring by the parent
or the guardian, that the bill is not just sent to the student,
but that there is a requirement that the monthly bill goes to
the parent, as well, because if the youngster does not fulfill
his obligation, somebody has to do it. And it's normally--
they're going to go to the parent, anyway. The quicker we can
bring the parent or the guardian into this situation to help in
that might be helpful.
Mr. Thurman. Sir, I would suggest that, in my opinion, I
would be opposed to that for a couple of reasons. The first
would be some--what I would think, just from a student
perspective, some obvious privacy concerns. Because although it
is a young adult, it is an adult past the age of 18, as Mr.
Clayton has pointed out.
But, secondly, as Ms. Lindstrom has asked, if we do--in
terms of our conditions for allowing them to have credit cards,
if we do apply the same conditions to students as we do to,
say, a 27-year-old line worker at the Ford Motor plant, then
what we will have is we'll have a student who has a part-time
job allowed to have a credit card, not monitored by their
parents, because they do have a source of income to pay that.
A student who has no job does not get that credit card.
And, as we have talked about earlier with cosigning, there is
then an option for that student to get that credit card. And if
the parent is cosigning, I would hope--or at least I know my
father would demand some type of status update as we went
along.
Mr. Scott. Right, right.
Chairwoman Maloney. The gentleman's time has expired.
Mr. Scott. Thank you for your--
Chairwoman Maloney. Mrs. Biggert?
Mrs. Biggert. Thank you, Madam Chairwoman. Mr. Thurman, in
your written testimony you say that these cards are not
tailored in any way to be financially beneficial for students.
For the large portion of students who really do use their
cards responsibly, isn't there really, in fact, a tremendous
benefit in the form of establishing credit history, and then
they have an interest-free loan each and every month?
Mr. Thurman. That is correct, Mrs. Biggert, that is true.
They have an interest-free loan each and every month, in terms
of the credit card in the first 6 months. Then you get the 15
to 19 percent actual APR.
And what I meant when I said that it's not targeted toward
students in any specific beneficial way is that there is
nothing that a student gains from signing up for a credit card
that my father doesn't gain from signing up for a credit card,
in terms of benefits.
Mrs. Biggert. Well, should there be any difference? And
isn't it--with a credit card and a young person starting out
with a card, they're going to have a really low limit?
Mr. Thurman. Sure, they're going to have a really low
limit.
Mrs. Biggert. And does that really, you know, affect
whether they would need to have a parent or anybody? Because
that really is risk-based pricing, isn't it, because the--let's
say--and as I recall, when my kids first started getting them,
they were really low, like $500 or something, and they realized
that they don't go very far with that.
Mr. Thurman. Yes.
Mrs. Biggert. And if they learn that lesson right then,
then they balance whether they're going to have an overdraft or
not.
Mr. Thurman. That's true. And if I may take that example,
the $500 limit, and then also use Mr. Clayton's statistical
analysis that, of total student consumers of credit cards, only
about 37 percent are carrying an average they don't pay off
every month. And on average, that balance is $452.
So, let's just assume on the low end they have a 15 percent
APR. Now, I have to admit, I got a C in finite math for
business, so you might want to check the math, but if I start
in the fall semester, and I spend $452 on textbooks--and I am a
full-time student, so I don't have a source of income--and I
have a 15 percent APR, by the time I finish that year in May,
which is when I can go get my summer job, that $452, which was
under the $500 limit, has gone up to $1,380. That is not
including the over-the-limit fees and the late payment fees
that I might incur.
Mrs. Biggert. But you are assuming that you are only going
to make the minimum payment.
Mr. Thurman. Actually, I am suggesting that I have no funds
with which to make the payment.
Mrs. Biggert. Then you shouldn't have a card.
Mr. Thurman. Very good point.
[Laughter]
Mrs. Biggert. But do you really think that it is--aren't we
making it, then, harder for students to learn about it and
obtain credit? I mean--
Mr. Thurman. I think if we take the position of quite
simply saying no credit cards for students, yes, definitely.
Mr. Clayton has a fantastic point. Students need credit cards,
especially when our Federal and State systems are failing them,
in terms of paying for higher education.
But what we have talked about here in our discussion is a
much broader scope of ideas: talking about cosigners; talking
about making sure certain information is made available to--
Mrs. Biggert. But still, it's going to be the same thing,
that if a student has $452 that they put on their card the
first month, and then they don't have the money to pay it back,
it's useless.
Mr. Thurman. Exactly. and if they didn't have the money to
pay it, that means they would have had to report a zero average
income, which, right now, gets me a credit card.
But if we're talking about actual same standards for
students as we have for people who work, for example, in a Ford
Motor plant--I'm sorry, I'm from Detroit originally, so I have
to plug the name--if we're talking about the same standards,
then that student doesn't get the credit card without the
cosigner. If there is a cosigner, then there is someone else
involved who does have some sort of income, otherwise the
credit card wouldn't have arrived in that student's mailbox.
Mrs. Biggert. Well, I don't think that their parents would
cosign it, if they knew that their child was not going to be
able to pay it off. I mean, you would assume that they're
sending money to somebody who is in college, or they're working
part-time, and they're going to build some funds. Because a
credit card is for a loan, it's not for just, you know, a piece
of plastic that they can charge with. And that's part of the
problem, is some of these kids never realize that.
Mr. Thurman. I would suggest two things, Mrs. Biggert:
First, that when we start talking about our students'
educations and financing it, that I am very reluctant to make
any assumptions, especially about family financing; and second,
that a credit card is not at all a loan. A loan is a loan, and
a credit card is a high-interest way to take care of,
hopefully, temporary financial needs. But that's not how it's
being used, due to the circumstances surrounding our higher
education system.
Mrs. Biggert. Well, I think we have a little difference in
the definition of what a credit card is, because it is an
unsecured loan. Okay. I will yield back.
Chairwoman Maloney. I thank the gentlelady for her
questions, and I thank all of my colleagues for their interest
and their input. And the panelists, we appreciate it.
The Chair notes that some members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 30 days for members to submit written questions to these
witnesses, and to place their responses in the record.
The hearing is adjourned. Thank you.
[Whereupon, at 4:10 p.m., the hearing was adjourned.]
A P P E N D I X
June 26, 2008
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