How Colleges Are Still Getting Rich Off Your Kids

College credit cards
College credit cards

If you want to grab customers for life, get them while they're young. That's the philosophy that credit card companies have used for years to access a lucrative source of profits -- student debt. All they had to do was offer free pizzas or other promotional gifts on campuses to get college students to fill out a card application. Then they doled out plastic and, predictably, many students got into trouble by charging up balances they couldn't repay.

Despite laws designed to stop the practice, colleges and universities are still taking huge payments from card companies -- at your kids' expense.

The New Card Game on Campuses

A newly released report from the Federal Reserve shows that credit card companies paid more than $73 million to schools and affiliated organizations in 2010. About 1.7 million credit card accounts were tied to higher educational institutions, with more than 46,000 of them newly opened during the year.

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The sad thing about the latest report from the Fed is that from one perspective, it's actually good news. The $73 million that institutions of higher education got from card companies last year was down from 2009's $84.5 million, and the number of open and new accounts both fell by 17%.

It would be easy for credit card consumer advocates to claim victory by citing the credit card reform laws that Congress passed last year as the main cause for the declines. The new card rules required students under 21 either to prove that they had enough income of their own to pay off their credit card debt or to get a parent or other adult as a co-signer on the account. In addition, the regulations forced card issuers to stop the practice of setting up booths or tables on or near campus that offered free gifts as an incentive for signed card applications.

But as you'd expect, card issuers have found ways around the regulations. Nothing prevents them from doing promotional giveaways as long as they aren't tied to filling out an application. Companies can also market student cards directly to the parents who presumably would end up acting as co-signers for them.

The Alumni Shift

Now it's true that not all of the cards involved are student accounts. The Fed report includes information about alumni associations that are affiliated with colleges and universities, and they receive the lion's share of payments from card issuers. Some of the biggest payments include $4.3 million to the Penn State Alumni Association, for more than 70,000 accounts, and $2.4 million to the Ex-Students Association of the University of Texas.

But even when you look only at colleges and universities themselves and leave out foundations and other affiliated groups, you'll find more than $18 million flowing into their coffers from the credit card industry.

To raise that money on the backs of students who are already strapped for cash -- and more often than not ridden with student loan debt -- seems at best a questionable practice.

The Winners and Losers of the College Card Game

In an era in which many schools are facing severe budget cuts and struggling to get by, money from card agreements can make a big difference. So how do colleges spend that money?

According to USA Today, the Cornell Alumni Federation, which received more than $900,000 from a marketing agreement with card issuer JPMorgan Chase (JPM), said the money went toward a scholarship fund, class reunions, an alumni innovation grant program, and other alumni programs.

But clearly the deals are profitable not just for schools but for the issuers that promote the agreements. Bank of America (BAC) subsidiary FIA Card Services is responsible for almost 85% of all agreements and paid more than three-quarters of all money that schools and their affiliates received from them, with Chase accounting for much of the rest. Other banks, such as US Bancorp (USB) and Barclays (BCS), get only minor amounts from school programs.

Regardless of who wins, the big losers are students who end up with credit cards before they're responsible enough to handle them. As long as colleges and universities take money from card issuers, they must share the blame for the financial devastation that comes from those cards.

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Follow Motley Fool contributor Dan Caplinger on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of JPMorgan Chase and Bank of America and also has opened a short position on Bank of America.