This story is the third in a series examining the increasing use of credit cards by college students.

It was three years ago and Irene Leech still remembers the shock clearly. An associate professor at Virginia Tech who specializes in consumer affairs, she read the terms of the credit card that her school, together with JPMorgan Chase (JPM), was marketing to students, alumni, and staff. Behind the card's shiny surface, featuring the football stadium at sunset, the so-called "affinity" card offered some of the most unfavorable terms around for card users. Among other things, the card had what's known as "double-cycle" billing, where interest is calculated over two months instead of the typical one, resulting in higher finance charges. "I was shocked," she says.

The experience convinced Leech that it was time for her to take a stand. First in a limited way and now more broadly, she has been speaking out against the conflicts of interest that universities face when they strike business agreements with credit card companies. Chase ultimately dropped double-cycle billing on the Virginia Tech card, as it did for all cards earlier this year. But Leech warns that schools that get money from credit card companies through affinity contracts or other marketing agreements face intractable problems, in which the school's financial interests are in direct conflict with those of students and alumni.

"Students assume that if the university has an affinity contract with a bank to offer a credit card, the university will surely look after them," she says. "But these contracts are really money-makers for the school, and not about services to the students."

Million Dollar Relationships

Leech isn't just taking on Virginia Tech, which takes in seven figures from the Chase deal. Nearly every major university in the country has a multi-million-dollar affinity relationship with a credit card company. The deals can be worth nearly $20 million to a single university. Schools, especially public universities supported by state revenues, are coming under increasing financial pressure to generate new revenue these days, and deals with credit card companies can provide a steady stream of income. And in most cases the worse the card terms are for students and alumni, the more profitable they are for the schools.

At a time when state support for higher education has languished, these contracts have become major sources of cash for universities. The University of Tennessee, which raised eyebrows with a $16 million deal in 1998, recently signed a pact with Chase worth $10 million—roughly $384 per student at a school with a total enrollment of 26,038. If Ohio State, with the nation's largest enrollment at 59,091, signed a similar deal, it could be worth more than $22 million.

Card issuers and schools say that these relationships are mutually beneficial. With affinity cards, the schools get income that they otherwise wouldn't, while alumni and students get the option of signing up for a credit card. The alumni association at Virginia Tech, which oversees the relationship with Chase, says its affinity card helps students and alumni build credit histories with unusually good service. "Hopefully card-users feel that they get more special care" says Thomas C. Tillar, vice-president for alumni relations at Virginia Tech. Some 20,000 people currently hold the card, including students, alumni, professors, and other staff.

But as a growing number of college kids pile up mountains of credit-card debt, the entire issue of credit-card companies on campus is coming under increasing scrutiny. Earlier this year, the state legislatures in Texas, Oklahoma, and New York voted to clamp down on credit-card marketing to college students (BusinessWeek, 9/4/07).

"Clear Conflict of Interest"

Congress plans to hold hearings on the companies' practices later this year. With such efforts underway, activists say that it is inevitable that the relationships between credit card companies and universities will ultimately face greater examination (BusinessWeek 9/3/07).

"Universities are pursuing these sweetheart deals with credit card companies, and offering up premiere marketing locations and student names and addresses for a big profit," says Robert Manning, director of the Center for Consumer Financial Services at the Rochester Institute of Technology. "It's a clear conflict of interest."

Affinity relationships typically mean that schools enter into partnership with a credit card company to issue a co-branded card. Bank of America (BAC) is the leading player in the field, with 900 agreements with schools nationwide. Chase has 40 affinity relationships with schools nationwide. In most cases the school is paid royalties for the partnership. Royalties can top $2 million dollars a year in exchange for offering the credit-card company access to student lists and exclusive marketing privileges at football games and other school events. In addition schools earn a set fee for each student, alumnus, or professor who signs up for a credit card, as well as a percentage of overall charges made on the cards, according to Manning.

Surrounded by Secrecy

Professor Leech, with her specialty in consumer affairs, was particularly sensitive to how customers would be treated in such situations. She also has been involved in the Consumer Federation of America (CFA), the consumer advocacy group based in Washington, D.C., and currently serves as its vice-president. When she found out about the terms of the Virginia Tech card she began quietly to campaign to persuade students to avoid the card. "I told whoever would listen not to use that card," Leech remembers.

One thing that Leech has objected to in particular is the secrecy surrounding the contract between Virginia Tech and Chase. When she began asking the alumni association questions about how Chase was selected, the criteria for the bidding process, and the specific terms of the university's deal, she was met with a brick wall. "These deals are kept very close to the chest," she says.

Virginia Tech isn't alone in this regard. Universities closely guard the financial terms of their agreements with card companies. This is true even in public schools, where open contract laws typically mandate transparency. "Schools don't want the public to see money made on these deals and so they broker the contracts through incorporated entities," explains Robert Manning. "There is so much of this money unaccounted for."

Benefits Scholarship Funds?

Only a handful of the contracts have been made public. It was in a hearing held by the U.S. Senate Committee on Banking, Housing and Urban Affairs where Manning testified that a contract between the University of Tennessee and FirstUSA was worth $16.5 million over seven years. He also testified that the University of Oklahoma received a $1 million signing bonus from MBNA.

A spokeswoman for the University of Tennessee said that its affinity card is marketed primarily to graduate students and alumni, not undergraduates. In addition, the school—which last year signed a new affinity contract with Chase for $10 million over seven years—sends the bulk of the money from such contracts to private scholarships.

When so much money is at stake, Leech and other advocates worry that the schools are seeking out the best contract for their own financial interest, not the students'. "The university is not demanding consumer-friendly terms, instead they are just seeing what credit-card companies offer them," says Leech.

Funding Financial Literacy

Tillar, from Virginia Tech's alumni association, says that when the school renewed its affinity card contract roughly a year-and-a-half ago, it did have a choice of two banks—Bank of America and Chase. Still, the bidding didn't allow Virginia Tech to negotiate better features on the affinity card, ensuring only that it could get a more competitive royalty package. "The bargaining is really with the royalty fee that is offered by the banks," says Tillar. The money, Tillar says, goes toward operating costs for the alumni association.

Some advocates argue that any money made from such credit card contracts should be used for financial literacy programs, to make sure students use credit responsibly. Manning has been campaigning for such programs, as well as for a reserve fund to bail out students who end up over their heads in debt. At Virginia Tech Tillar hopes to use some money from the Chase contract to provide financial literacy education, although the program hasn't been set up yet.

All of these steps are too modest for Leech. She says that the relationship between universities and credit card companies is simply too complicated to keep. "These affinity contracts are compromising and people need to wake up and examine them."

Silver-Greenberg is a reporter for BusinessWeek.com.

This story ran on Business Week on September 6, 2007.