Penn State University earned more than $2.7 million in fees and royalties in 2011 through a deal helping Bank of America peddle high-interest credit cards to its alumni and students.
That put the university at the very top of the list of the colleges and universities in partnership with the credit industry, according to information that's now available publicly following government overhauls meant to -- among other things -- make it harder for credit card companies to target college students.
Colleges and universities have for years been playing a key role in their students being sucked into the vicious cycle of credit card debt. In exchange for what could amount to millions of dollars in fees and royalties, colleges have opened their campuses to major banks offering credit cards to undergraduates with no jobs, no verifiable income and no credit history.
The practice is declining. Credit card companies in 2012 paid $50.4 million in fees and royalties to colleges, universities and related groups, which is down significantly from the $84.4 million paid out in 2009, according to the Consumer Financial Protection Bureau. The number of agreements that banks have signed with colleges and universities also has fallen from 1,045 institutions in 2009 to 617 institutions in 2012.
The change is largely attributed to rules stemming from the Card Act of 2009, sweeping legislation that established rules for fair and transparent practices for card companies. While it hasn't eliminated the relationship between credit card companies and higher education, it has allowed greater transparency on those that continue the practice.
For example, under the terms of a 2005 contract that's still in effect, every time a student or alumni of Penn State signs up for a credit card issued by FIA Card Services (a subsidiary of Bank of America), the Penn State Alumni Association receives a payment of $5 to $10, according to information from the CFPB.
The alumni association also collects a 1 percent kickback royalty on all retail purchases Penn State alumni make using the cards. The association earns a 0.5 percent royalty on all purchases made by students of Penn State.
Meanwhile, Bank of America collects 18.4 percent interest on all unpaid balances. Nationally, low-interest credit cards currently charge an average of 11.01 percent, according to Bankrate.com.
The number of accounts connected to the contract has slipped. As of Dec. 31, 2012, Bank of America reported 60,490 open accounts at Penn State, which was down from 65,955 in December 2011.
Penn State initially entered the confidential partnership with the credit card industry on April 1, 1995, according to records available through the CFPB.
Sharing the details of such relationships is important, according to the director of the Washington, D.C.-based consumer agency. "Students and their families should know if their school, whether well-intentioned or not, is being compensated to encourage students to use a specific account or card product," said Richard Cordray, in an official statement. "When financial institutions secretly give kickbacks to schools, they are engaging in risky practices."
Under the tougher rules included in the 2009 card regulation, students must now be at least 21 years old to sign up for a credit card, or have a co-signer who will assume responsibility for the debt. Students also must verify their ability to make payments.
While the government overhauls have severely cut down the number of colleges signing contracts with card companies, some colleges in Pennsylvania and across the nation have chosen to stay on the credit card gravy train.
The No. 1 player in the nation is Penn State Alumni Association, which had 60,490 total open credit card accounts in December 2012 as a result of its contract with FIA Card Services. The Alumni Association of the University of Michigan comes in at a distant second place with 31,090 total open accounts, according to federal records.
Penn State Alumni Association spokesperson Jill Gomez did not respond to requests for comment.
One of the provisions of the Card Act of 2009 required credit card companies to file a copy of their agreements with colleges and universities with the CFPB. The bureau, in turn, is required to make the documents public.
Federal records show 41 Pennsylvania colleges and universities prior to 2012 were contractually obligated to provide credit card companies access to their campuses and provide personal contact information for alumni and students.
Only 24 of the colleges had agreements in effect as of Jan. 1, 2012. The most prominent names on the list of Pennsylvania colleges with active contracts with the credit industry include Penn State and the University of Pittsburgh, which collected $15,813 in payments from FIA Card Services in 2011, according to the latest data available.
Duquesne University, Chatham University and Carnegie Mellon University do not have contracts with the credit card industry.
"Duquesne has not permitted credit card companies to solicit our students or set up booths on campus for more than 10 years," said Bridget Fare, assistant vice president for public affairs at the university. "Years ago, when the practice of targeting students was first gaining a lot of traction, the administration made the decision to deny requests from card companies in an effort to help prevent students from getting buried in credit card debt."
Some of the more common tactics that card companies used in the past was to offer college students a free pizza, a coffee mug or a free T-shirt for filling out a credit card application. The Card Act of 2009 put the brakes on such marketing tactics by prohibiting credit card companies from giving away tangible items on college campuses.
"The Card Act did a good job in some areas, one of which was cutting down on issuers taking advantage of students," said Bill Hardekopf, CEO of LowCards.com, a website that helps consumers compare credit cards. "There are so many college students that don't receive financial training, and they are not as responsible as they should be when they get out on their own."
Although business in the college sector has fallen off dramatically for the credit card industry, banking analysts say colleges are a small segment of the overall market. The immediate impact of losing business with colleges is not severe, but it could have ripple effects on the industry -- and on individuals -- in future years, said Nessa Feddis, senior vice president and deputy chief counsel at the American Bankers Association in Washington, D.C.
"Marketing to colleges was an important aspect of the credit card business because it was often a person's introduction to credit cards," Ms. Feddis said. "It was largely about building a relationship, not necessarily about profit. The impact will more likely be felt down the line.
"There is some positive aspect in that students who are not ready for credit cards won't get in trouble. But students also will be lacking a valuable resource for an emergency backup if their car breaks down or they are stranded. They also lose the chance to build a credit history and that could cause them to have a lower credit score."
For card companies, the name of the game is brand loyalty. Card issuer MBNA America made it clear in the contract with Penn State Alumni Association that any display of disloyalty by the college or former head football coach Joe Paterno would be considered a breach of contract and the bank would not have to pay fees and royalties to the college.
In fact, Paterno, who died in 2012, signed a $100,000 deal in November 2003 with MBNA America (which was bought by Bank of America in 2006) for agreeing "to provide one personal appearance each consecutive twelve-month period," until Jan. 2, 2009, at a place and time he and the bank agreed on. In addition, the coach agreed to do a once-a-year personal recorded radio performance to advertise, promote and market the bank's products.
Paterno signed another $100,000 contract Jan. 1, 2009, with FIA Card Services (also owned by Bank of America) extending to Jan. 2, 2010, which required him to sign 200 footballs and 50 helmets to be used by the bank for exclusive marketing purposes.
The agreement which Paterno signed with the bank -- a copy of which was obtained through the CFPB -- had been stamped "confidential."
Correction (January 15, 2014): Bridget Fare is Duquesne's assistant vice president for public affairs. An earlier version of the story listed an incorrect title.
Tim Grant: firstname.lastname@example.org or 412-263-1591.