Copyright 2007, Des Moines Register and Tribune Company
Iowa's two largest public universities are aggressively marketing credit cards to their students as part of an arrangement that generates millions of dollars for the schools' privately run alumni organizations.
Publicly, the University of Iowa and Iowa State University have expressed concern over the debt of their students, many of whom graduate with $25,000 to $30,000 in bills to pay. The schools say they are trying to reduce that debt load.
At the same time, however, the two schools have signed deals with their alumni associations in which they have agreed to endorse, promote and profit from Bank of America credit cards marketed directly to students.
Records obtained by The Des Moines Register also show that the U of I has agreed to give the bank access to databases that include the mailing addresses, telephone numbers and e-mail addresses of students, parents and people who buy tickets to Hawkeye football and basketball games. The university has also promised to provide its biggest-spending cardholders with exclusive access to university facilities, coaches and even student athletes.
The practice is part of a widespread but increasingly controversial effort by colleges and universities nationwide to form partnerships with for-profit lenders.
In Iowa and most other states, the financial details of those partnerships are often shrouded in secrecy, despite the involvement of public universities that rely on taxpayers to provide a substantial portion of their operating revenues.
Nationally, consumer advocates and state legislators are protesting such activities. Federal legislation to curb on-campus marketing of credit cards is under consideration, and U.S. Senate hearings are expected this fall.
"We're very concerned about these exclusive contracts that provide kickbacks to the universities," said Ed Mierzwinski of the Public Interest Research Group. "We want colleges to be responsive to their students."
University and alumni association officials say the millions of dollars they collect through the credit card deals benefit the schools and their students.
"Whether you say 'kickbacks' or you say 'royalties,' we've been upfront with our constituency, and we share with them how we're using those dollars," said Jeff Johnson, president of the Iowa State University Alumni Association. "We have a commitment to student leadership and student scholarship."
U of I officials say there are 208 students actively using the U of I credit cards, and the average balance is $1,028.
At ISU, there are 289 students with active cards, and Johnson said their average balance is about $389.
"Most of our students arrive on campus already carrying a credit card," Johnson said.
Schools' promoter role troubles critics
Consumer advocates acknowledge that alumni, rather than current students, are the primary target of credit card companies and the universities' marketing efforts.
But those advocates contend the schools are also facilitating on-campus marketing aimed directly at students who have limited income and are struggling with debt from student loans. They say public assets are being used to enrich corporate lenders and privately run alumni groups.
At the Register's request, Mierzwinski, the Public Interest Research Group official, reviewed the available contracts involving the two Iowa universities' credit card programs.
He said the agreements illustrate "a big-bank strategy to gain the exclusive right to peddle high-priced credit cards" to students at the schools.
"Nothing in these contracts provides for any significant restrictions on campus credit marketing practices, nor on the rates charged on student cards," he said. "These flaws all require changes if students are to be protected from predatory financial practices."
U of I alumni officials declined to say how much they are paid through their arrangement with Bank of America. Also, the bank declined to comment on its partnerships with Iowa schools.
But federal records show the University of Iowa Alumni Association was collecting $550,000 per year from MBNA, now Bank of America, through 2005.
Under the terms of the association's newest contract with the bank, the school is guaranteed at least $200,000 per year - all of which is to go to the athletics department.
Some of that money is considered payment for eight club seats at every Kinnick Stadium football game through the 2012 season. At today's prices, those seats - some of which are used by Bank of America representatives - would have a total value of $145,600.
Chris Bavolack, vice president of the U of I alumni association, declined to comment on the revenue-sharing deal that results in the association collecting additional money as cardholders' debt loads increase. Typically, though, such arrangements result in alumni groups collecting 20 to 50 cents for every $100 of credit card purchases.
Bavolack said the association's most recent annual audit report should be completed and made public in a few weeks. Although that document will not spell out the terms of the deal with Bank of America, he said it will show how much money the association collected from the lender last year.
The ISU alumni association stands to collect at least $500,000 annually from Bank of America through 2012. As part of that deal, the school receives an annual guarantee of $40,000 to $42,000, and all of that goes to the athletics department.
The University of Northern Iowa Alumni Association refused to make public its contract with Bank of America, but association President Mark Jastorff said there have not been any association-endorsed solicitations aimed at students, directly or indirectly, over the past six months.
"We do not do that," he said. "Credit woes are a serious issue, and they affect students as much as anyone else."
One sales pitch: 'Pay for your books'
The sales pitch that arrives in students' mailboxes in Iowa City is written on alumni association letterhead that includes the trademarked logo of the U of I.
The letter is signed by Vince Nelson, president of the U of I Alumni Association.
It begins: "Imagine the convenience of being able to purchase supplies for your classes without worrying about carrying a lot of cash. You could pay for your books - or get quick cash in an emergency - and put it on one easy-to-use account. That's the kind of flexibility every student can appreciate and it can be yours with the University of Iowa credit card."
Nelson's pitch also includes this postscript: "Bank of America helps support the University of Iowa with every account opened, and for every purchase made with the card. All at no additional cost to you."
Actually, the support flows both ways.
Although the bank has contracted only with the alumni association, and not directly with the school, the association has signed a contract with the school committing the university to "creatively and aggressively" marketing the Bank of America card.
As part of that agreement with the association, the university has promised to provide Bank of America with lists of all people who purchase season or single tickets to athletic events - a list that would include students, parents and other supporters.
Separately, the school has also agreed to provide, for Bank of America's use, electronic lists containing the phone numbers, e-mail addresses and mailing addresses of students and their parents, assuming the students didn't ask that access to the information be restricted. Alumni officials say no information on parents has been provided to Bank of America so far, but they expect the information could be provided later this year.
The deal authorizes the university to play a direct role in signing up new cardholders by pitching new accounts to students and others attending various athletic events. In return for every new account opened as a result of the university's sales pitches, the school collects $50.
The agreement obligates the university to help sell the credit cards through public-address announcements during games at Kinnick Stadium and Carver-Hawkeye Arena. Card applications are mailed to buyers of sporting-event tickets, and the cards are promoted in advertisements during the coaches' weekly TV shows.
At ISU, interest rates higher for students
The ISU alumni association has been in the credit card business for 19 years. In 1995, the organization signed a deal with MBNA to market ISU-branded credit cards on the university campus for five years.
Under the terms of that deal, the alumni group received $750,000 in royalties, plus a $30,000 signing bonus, plus $1 for every new account that was opened, plus $1 for every card that maintained a balance of more than zero.
The contract called for student cardholders - typically a high-credit-risk group - to be charged a higher interest rate than alumni. Students would pay a rate equal to the prime interest rate, plus 9.9 percent. Alumni cardholders would pay 7.9 percent.
In 1999, the deal was renegotiated and extended through 2005. Royalties to the alumni were increased to $5 million - with $4 million of that paid upfront as an advance.
At the same time, the university got involved in the deal.
The athletics department agreed to exclusively endorse the credit card program at athletic events and agreed to give the bank, free of charge, the names and contact information of season- and single-game-ticket holders.
The school also agreed to give the bank exclusive on-site access to students and fans at athletic events. The company could set up booths and tables to sign up cardholders at football and basketball games. To help with the "Charge it to Cy" campaign, the school authorized the bank to give T-shirts, hats and bobbleheads as gifts to new card applicants.
When the contract was renegotiated in 2004, Johnson, the alumni association president, sent a memo to school officials, saying he was excited about "a more active partnership with the school" and the "chance to increase the number of active card users and carriers, thus yielding increased revenues."
As part of that new contract, the bank agreed to give the school $75,000 to help renovate a campus building. In return, the school promised to give the bank "permanent named recognition of its gift" inside the building.
The alumni association promised Bank of America that it would arrange with the nonprofit, tax-exempt Iowa State University Foundation to solicit interest in the credit card program during its fundraising campaigns.
The new agreement also resulted in a decrease in the alumni group's share of revenue: The royalty payments were reduced to $3.5 million, and the schools' share of revenue from cardholders' charges dropped from 40 cents per $100 to 20 cents.
Free burritos - for Citibank application
It's impossible to say whether the credit card programs at the U of I and ISU are consistent with arrangements at other U.S. colleges and universities. Few schools publicly disclose the terms of their credit card agreements.
One exception is the University of Tennessee, where the student body is similar in size to those of ISU and the U of I. The Tennessee alumni association expects to collect $9.8 million over seven years in return for an exclusive marketing deal with Chase credit cards. A previous agreement with FirstUSA generated $16.5 million over seven years.
Mierzwinski, the Public Interest Research Group official, contends that despite the big money that can be made, colleges and universities should not engage in on-campus marketing of credit cards.
He says school-sponsored giveaways to new account holders - which sometimes include offers of free food or clothing - are calculated to turn what should be a carefully considered financial decision into an impulse purchase.
Not all the giveaways are school-sponsored. Last week, the Ohio attorney general sued Citibank after fast-food restaurants distributed fliers at Ohio State University, offering students free burritos and sandwiches. What the restaurants failed to advertise was that the students needed to complete an application for a Citibank credit card to get the free food.
Earlier this month, hundreds of University of Minnesota students flocked to a Domino's Pizza store after being promised a free meal. Once there, students were told they needed to fill out a Citibank credit card application. The restaurant's manager told the student-run Minnesota Daily that 800 to 900 students took advantage of the offer.
Robert Manning, a professor of consumer finance at the Rochester Institute of Technology, has testified before Congress several times about on-campus marketing of credit cards.
He says such programs increase the likelihood of students failing to complete school. He faults school administrators for having a "greater interest in increasing credit card royalties than in fulfilling their responsibility to ensure the graduation of their students with the lowest possible level of financial debt."
Using a credit card to pay for textbooks and class supplies can be risky, too. The U of I card offered to students has an interest rate that can balloon to 29.99 percent in the event of a single late payment. Such provisions are not unusual, but students are a transient group, with frequent mailing-address changes that can cause delays in delivery of credit card bills.
Lawmakers consider protecting students
Lawmakers in five states have proposed legislation this year to curb credit card marketing to students.
Two weeks ago, California enacted a law that restricts some of the same practices now being used on the U of I and ISU campuses, such as handing out T-shirts or other gifts to credit-card applicants at school events.
Three weeks ago, lawmakers in Texas approved legislation restricting the time and place where such gifts can be handed out. Proposed legislation in Oklahoma would have barred universities from selling student information to credit card companies.
Some schools are not waiting for legislative action.
Three years ago, the alumni association at Graceland University in Lamoni contracted with MBNA to create a Graceland credit card. But that deal put Graceland students off-limits to any solicitations.
Although Graceland is a private school and is not subject to Iowa's open records law, that alumni group publicly disclosed the financial details of the arrangement with MBNA after the deal was completed.
"We don't bring credit card solicitors onto campus, and we don't put solicitations into student orientation materials," said Sherry Morain, Graceland's director of financial aid. "We don't need to be pushing these on students. They get enough information on credit cards as it is."
Reporter Clark Kauffman can be reached at (515) 284-8233 or firstname.lastname@example.org
This story ran on DesMoines Register on September 23, 2007.