You might say that Joseph E. Johnson, president emeritus of the University of Tennessee, thinks like any savvy chief executive officer. When the university hit what he called "a point of crisis" last year because of inadequate state fiscal support, Johnson forged one of the most lucrative corporate sponsor deals ever.
In a $16 million arrangement with First USA, the credit-card division of Bank One Corp., the bank is the sole marketer of the university's Visa "affinity" credit card--a card adorned with the school's picture and logo--to the university's students and alumni. "A lot are concerned that we're soaking our students, but we decided to do this in a reputable way rather than to let just any issuer on campus to solicit. Plus we needed the funds," says Johnson, who retired last month. In addition to the $16 million, divvied up over the course of seven years, the university receives 0.5% of every transaction charge, which could amount to an estimated $4 million annually.
More colleges and universities face similar budgetary problems, and credit-card companies are rushing in to fill the gap. Card companies pay for everything from mentoring programs to lecture series to cap-and-gown rentals. "You're finding much more of a willingness for schools to cut all kinds of creative sweetheart deals with corporations for big money," says Lewis Mandell, dean of the State University of New York at Buffalo's management school and the author of three books on credit cards.
The deals obviously benefit schools, but the real winners are card companies. Credit-hungry students are often a card issuer's best customers, despite the fact that most don't have a credit history or even a job. "If it's the first card you get, chances are you'll hold on to it for a long time," says Robert B. McKinley, CEO of CardWeb.com Inc., a credit-card tracking service. Studies show that students keep their first credit card for an average of 15 years.
Card marketers also like students because 70% of those with cards at four-year colleges have $2,000 or more of revolving debt, according to the Consumer Federation. And ironically, students are less of a credit risk than the general population because their parents often pay their bills.
TOO FAR? Once a bank secures a captive student audience, it can market other products such as first mortgages, car loans, and, in a sinister twist, debt-consolidation loans to help students repay credit-card debt. "They've got 'em and they know it," says Robert Manning, a sociology professor at Georgetown University and author of a recent study on students and credit cards.
Indeed, a growing concern is that affinity-card programs have encroached too far into academia's supposedly hallowed halls. At the University of Ottawa, MBNA Corp., the largest affinity-card issuer, started an alumni-student mentoring program last year. At the University of Hawaii, MBNA provides video production services and airtime to "ensure continuance" of the weekly UH Today radio and TV show. Says Manning: "You can't tell me that having a credit-card issuer controlling student media won't impact editorial decisions." Manning's Georgetown University gets paid an undisclosed sum by MBNA for rights to the Georgetown affinity card. Also, MBNA contributed $2 million several years ago to fund what is officially called the MBNA Career Education Center.
"DANGEROUS." In the face of all of this, student credit-card debt is mounting, due primarily to aggressive card marketing and students' lack of credit knowledge. According to the Consumer Federation study, debt among college students has almost tripled since 1990. "That's why these mega credit-card deals are more dangerous than, say, whether a college chooses to be a Coke campus or a Pepsi campus or give all of its athletes Nike shoes," says Mandell.
Because of worry over student debt, a growing number of colleges and universities are restricting or banning campus-card marketing by non-affinity-card issuers. Still, most schools, especially large state schools, are not nearly as quick to turn down blockbuster affinity-card deals. "Colleges will say they've done a deal with a single issuer in order to get competing card marketers off campus and to control the process. But what difference does it make if you're a student with $10,000 of debt on an affinity card vs. another type of card?" asks Manning.
One of the reasons affinity cards have become so popular and lucrative for both colleges and credit-card issuers is that the cardholders are more loyal. "If you've got a card with your college on it, it's like being part of a club. There's pride involved," says McKinley. Part of that loyalty stems from the idea that the cardholder is donating to his or her school or alma mater each time the card is used. In most affinity-card deals, in addition to an up-front flat fee sometimes as much as several million dollars, a college receives half of a percent of the purchase value of each transaction made with the card.
In addition, schools are often paid anywhere from $5 to $20 on each new account that is opened and sometimes a small percentage of loans outstanding. But card issuers emphasize that each deal they make is unique. "We make proposals to schools based on their particular needs and the information they give us," says Jeff Unkle, a First USA spokesman.
For their part, card issuers and schools often argue that affinity cards are tied to the alumni association, not the school itself, but this can be misleading. "In these deals, the contracts typically specify that issuers have access to student mailing lists and can solicit directly on campus," says Manning.
In a typical First USA or MBNA deal, for example, the bank is the only issuer allowed to market on campus and through student and alumni mailing lists--a coup for any card issuer in these days of cutthroat competition for the college market. At the University of Tennessee, for instance, there are some 270,000 alumni and 26,000 students, in addition to untold numbers of UT fans who are also solicited at sporting events.
Although schools and card companies are pleased with the deals, some factions are not. This spring, the Tennessee state legislature nearly passed a bill that would have prohibited credit-card solicitations on campuses altogether, thus terminating the university's deal. The bill will be reintroduced next year. As part of the pending bankruptcy bill, Congress is considering a proposal that would allow credit cards to go to people under 21 only if they have parental approval or are financially independent.
"We realize that students may lack credit experience, but most of them are extremely responsible and handle credit cards as well or better than most adults," says Brian Dalphon, a spokesman for MBNA.
As affinity-card programs remain highly lucrative for both colleges and card companies, they will likely continue to remain BMOC--big money on campus.