GAO Report on College Students' Credit Cards

Representatives Louise M. Slaughter, John J. Duncan and Paul E. Kanjski recently requested the General Accounting Office (GAO) to address four basic issues related to college students and their use of credit cards.

In response to this request, the GAO conducted about 100 interviews with college officials at 12 universities. In addition to reviewing existing research on students' credit cards, the researchers also gathered applications for credit cards and "observed the solicitation of students at tables set up in student unions." They also interviewed officials from five credit card issuers and five consumer groups. In its June 2001 report the GAO noted that it was also negotiating with nine credit card issuers to obtain data on student accounts.

The issues and findings of the GAO follow.

1. The advantages and disadvantages credit card use poses to college students

   "Credit cards were generally perceived as advantageous to college students, but there were also concerns about the risks they presented for this group." On the one hand, credit cards offer students greater security (vs. cash) and allow them to met unplanned expenses or emergencies. They provide ready access to cash at ATM machines and the ability to shop by telephone or online on the web. At the same time, they are able to establish a credit record that would enable them to obtain more credit after leaving college. But college counselors, representatives of consumer groups, and debt counselors are concerned that students' inexperience leads them to assume debts that they cannot pay. This problem would be especially acute for those who also have student loans to repay after graduation.

2. The results of key studies showing how college students acquire and use credit cards and how much credit debt they carry.
   • More than a third of students had credit cards before arriving on campus, and another third obtained their cards during the first year.

   • Two large previous studies have shown that 63 and 64 percent of students had credit cards. Most of the cardholding students (59 percent) reported paying their balances in full each month. Among the 42 percent who did not pay full in one study, the average balance was $577. One study found that more than half of the students had credit limits of $1,000 to $5,000, while the other found that about a fourth of the respondents had credit limits above $5,000. The first survey was based on telephone interviews with a random sample of 750 students. The other was based on personal interviews with a sample of 1,200 students at 100 colleges and universities.

   • There is no evidence that students were motivated to drop out of college because of their credit card debts. Only 5 of the 12 universities visited collected information on why students dropped out. Among those institutions that did ask, "credit card debt was not generally cited by students as a reason for their decision to withdraw," although 7 out of 112 cited "financial concerns, including credit card debt, as possible reasons why students decided to leave."

   • Other studies that were based on self-reporting or on credit reports showed that students who carry large balances forward from month to month accumulate high interest charges on large amounts of debt.

   • The GAO was unable to find data on the number of bankruptcies filed by students. Analysis of a sample of 1,974 filings for bankruptcy in 1999 showed that only 6.9 percent were aged 18-24, whereas 29 percent were aged 25 to 34.

3. Universities' policies and practices related to credit card marketing.
   • As might be expected, "Universities' policies and practices-particularly regarding solicitation-varied not only across universities, but also within the universities themselves." In spite of the on-campus solicitations, only 24 percent of cardholding students had obtained their credit card via on-campus marketing, while the other students had obtained their card through direct mail (37 percent) or through application at a business (36 percent).

4. Business strategies and educational efforts that credit card issuers direct at college students.
   • Card issuers used customized credit-scoring systems to reduce their risk and to protect students from becoming over-indebted, thereby also limiting credit losses.

   • Data from five credit-card issuers that market to college students show that rates charged are typically related to the perceived risk of the applicant. In the three instances in which late fees were reported, they were the same for students and non-students in two cases and in the other the late fee was $19 for students and $29 for non-students.

   • The GAO found that credit card issuers offered a wide variety of financial education programs to help students understand and manage their finances in general and their credit cards in particular.

    

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