Legislation passed overwhelmingly in the Senate May 19 would make it tougher for college students to sign up for credit cards, which often put young people in debt and subject them to high interest rates before they graduate and start in the workforce.
The bill–which also curbs credit card issuers’ ability to raise interest rates and card holder fees–passed the Senate 90-5, and the House is expected to vote on the legislation later this week. President Obama could sign the bill before Memorial Day, and the law would take effect early in 2010.
People under 21 would have to have parental permission before they signed up for a credit card, unless they could prove financial independence or pass a financial literacy course that demonstrated understanding of payments, interest rates, and other crucial details of obtaining credit.
The new law would affect college campuses that have become primary targets for credit card companies marketing to new customers. Lobbyists for the banking industry wrote a letter to senators this week warning that placing a new series of restrictions on credit cards would worsen the credit crunch the country has suffered through since entering an economic recession last year.
If enacted, the bill would "have a dramatic impact on the ability of consumers, small businesses, students, and others to get credit at a time when our economy can least afford such constraints," the American Bankers Association wrote in its letter.
Curbing young people’s access to credit cards will force creditors to find new ways of marketing to students who are financially dependent on their parents, said Peter Morici, an economist and professor at the University of Maryland’s Robert H. Smith School of Business.
"I would think this will make it more difficult [for students to apply for credit cards], but I don’t know if that will eliminate it," said Morici, adding that creditors may take advantage of the legislation’s loose definition of financial independence. "I don’t know how well it’ll hold up in the long run. [Creditors] want to put these cards into the hands of young people, and I believe they will find a way to do it."
College students’ increasing debt was made clear in a recent study conducted by Sallie Mae, the country’s biggest college lender. In 2004, the average college graduate had $2,900 in debt; by last year, that number had jumped to more than $4,000, according to the study, which was released in April. Eighty-four percent of U.S. college students had at least one credit card in 2008, up from 76 percent in 2004.
And students aren’t just paying for books and school supplies with their credit cards. About 30 percent of students pay their tuition with a credit card, according to the Sallie Mae study. That’s a 6-percent increase from 2004.
"Too many students are at risk of overpaying for college by pulling out credit cards to pay for textbooks or even part of their tuition bill, instead of using less expensive financial aid to cover these items," said Marie O’Malley, director of consumer research for Sallie Mae and author of the study.
College freshmen have seen a substantial increase in average debt since 2004. Only 15 percent of first-year students had no credit card debt in 2008. In 2004, nearly 70 percent of freshmen did not have any credit card debt, according to the study. Average debt for freshmen tripled from 2004 to 2008, from $373 to $939.
The need for more comprehensive training in accessing credit was made clear in the Sallie Mae research. Eighty-four percent of student surveyed said they "needed more education on financial management topics," and they thought educators should teach more financial planning in high school and the first year of college. Nearly two-thirds of students said they were surprised at how quickly their credit card debt ballooned as interest rates were tacked on to monthly balances.
Morici at the University of Maryland said federal lawmakers should be wary of placing too many restrictions on who can apply for credit cards, because credit plays a critical role in establishing financial stability for many young Americans.
"You don’t want to be too restrictive with this," he said. "A credit card is a useful tool to get through the world."
Material from the Associated Press was used in this report.