In part two of our story on the effects of the CARD Act, we take a look at student credit card borrowing and debt. (Catch up with part one.)

Since the passage of the Credit Card Accountability Responsibility and Disclosure Act of 2009, no regulatory relationship has changed more than that between credit card issuers and student customers. Before 2009, students were able to borrow thousands of dollars on several different cards, all with easy approval processes. Irresponsible credit card issuers were saddling inexperienced credit card users with massive amounts of high-interest debt upon graduation, all in addition to student loans.

The CARD Act altered creditors’ easy access to the college market. Now, lenders can no longer issue credit cards to anyone under 21 without a co-signer or proof of income or other means to repay debt. And, they must publicly disclose all deals brokered with schools and alumni associations to market cards towards students. Furthermore, banks are no longer allowed to give away promotional items to attract new college customers. In the past, banks had used free pizza and other similar promotions to get students to sign up for their cards.

While the no-free-pizza part of the bill is not likely to affect the industry, the regulations against letting minors sign up on their own without a co-signer or a job will almost certainly tighten up the amount of money that credit card issuers can lend.

Credit card companies have a troublesome history when it comes to college students. One notable figure stands out in any discussion of student credit card use in the last decade: Sallie Mae’s discovery that students carried a median credit card debt of $1,645 and an average debt of $3,173. Sallie Mae collected this data from credit ratings agencies’ 2008 data, and published it in 2009 — it is still frequently cited.

What few point out, however, is another Sallie Mae report, issued just a few years later, called “How America Pays for College, 2011”, perhaps because this report took a smaller sample size and relied on self-reported data. It paints a very different picture. The average outstanding student credit card debt among American students in 2011 is a mere $811, and the median debt is $189.

That is about a 400% reduction in the average balance carried by students, and an 870% reduction in the median balance. Self-reported or not, that likely represents a substantial change in the way students use credit cards. While statistical errors and self-reporting cannot account for a change in the order of magnitude of outstanding student debt, changes in the industry can.

Remember, too, when considering these statistics, that undergraduates come in cohorts —four or five year groups whose debt disappears from these studies come graduation, even though it stays on their balance sheets. The data don’t represent a massive pay-down on principal; we’re looking at a new cohort of students who are maybe savvier about credit cards and definitely have less easy access to them.

The Federal Reserve Board now releases an annual report that details card issuers’ deals with colleges and universities. The FRB’s second report on the topic revealed that new student credit account openings were down by 17% in 2010.

A quick look at APR rates over the years reveals a telling trend, too. In August of 2007, nationwide APRs across all sorts of credit cards hovered at around 13.65%; the latest reports put the average APR a bit higher, at 15%. Only one type of card has shown a significant reduction in APR over this period: student cards.

Student cards averaged an APR of 17.55% in August of 2007, well above average rates; today they average 13.77%, almost four full percentage points lower than four years ago, and well below the average across-all-categories APR.

Just as our average and median balance carry numbers reflect a new cohort of students who might be savvier about debt, and have less access to it anyway, these average APR numbers show a credit industry acting more responsibly towards college borrowers.

Odysseas Papadimitriou, CEO of, explains that the requirement that banks look into their college customers’ finances should not have been that revolutionary for the industry — it only requires that they treat college students like they treat everyone else. Smart companies were doing this already, he explained.

And because banks are checking their customers’ finances or asking for co-signers before approving lines of credit, the under 21 market is inherently less risky. This likely accounts for the decline in student card APR, while the rest of the market has suffered through rising APRs due to the increases in delinquencies (and therefore, risk) in the normal credit card market.

Due to the new regulations, students are quarantined from the fluctuations in APR in the rest of the market; before they came into play, students were dealing with higher APR because they were technically subprime borrowers.

And as for the lowering of the debt students carry from month to month? That’s also the regulation doing its job: because lenders must actually examine students’ ability to pay back, which is normal due diligence for extending credit, students can’t simply open up a new line of credit after they’ve maxed one out. Their credit limits will likely be much lower on their second card, explained Papadimitriou, and they probably would not be offered a third one after maxing out their second.

So, in short: the regulation works quite well: students aren’t being lent to in predatory fashion, and the result is a better array of options for young people, as the irresponsible lenders have to shape up or leave the market, which is a strategic one to corner — if you get a customer in college, you’ll have a college graduate as customer down the road. They earn more than their less educated peers.

As for lenders that cannot conform to the CARD Act, which doesn’t ask that much of lenders in the first place? “If it limits them,” says Papadimitriou, “it does so for their own benefit.”

So while some issuers have left the market, like Chase (who declined to state whether the closure of their +1 product had anything to do with the new regulations), plenty of savvier issuers have stayed in the market with great success, specifically: Capital One, Citibank, and Discover.

Most of these lenders haven’t had to change a thing about the way they do their business, because they always treated student customers like regular customers. That’s all the legislation really asked of the banks, and that’s all they had to do. With regard to student borrowing, the CARD Act has been a resounding success.

Sources Consulted:

“How Undergraduates Use Credit Cards”. Sallie Mae, 2009.
”How America Pays For College 2011”. Ipsos/Sallie Mae, 2011.
“Federal Reserve Board of Governors Report to the Congress on College Credit Card Agreements”. Federal Reserve, 2011.
“Weekly Credit Cards Rate Report: February 28, 2008”., 2008. (Aug 2007 date extrapolated from 6 Month Prior column:
“Rate Survey: Credit card APRs reach another record high”., 2011:
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