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Why Banks Paid Millions to Get on Campus

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For credit card companies, the best borrower is one who racks up plenty of debt and pays it off slowly but surely. To find those customers, card issuers will do a lot -- including paying millions in cold hard cash.

A report from the Federal Reserve has new information on one group of these excellent customers: college students. Thanks to the credit card reform laws passed last year, card issuers were required to disclose the agreements they make with colleges and universities, as well as affiliated organizations like alumni groups, in order to offer cards to college students.

Starting them early
College students have long been a treasured source of business for credit card companies. For the price of a pizza or a baseball cap, card issuers persuaded many students to sign an application and start spending. Only after putting hundreds or even thousands of dollars on their cards do many students realize that they're in over their heads. By then, it's too late to fix the problem without major effort.

It wasn't entirely clear just how lucrative college students were to card issuers. Based on figures released in the report, though, it's obvious that the college market was worth a lot to major institutions.

The king of college
Far and away, the biggest promoter of college-related cards last year was Bank of America (NYSE: BAC  ) subsidiary FIA Card Services, which had a whopping 906 agreements with institutions of higher education. The company paid almost $62 million to those institutions under the agreements and opened more than 38,000 accounts during the year. That translates to around $1,600 paid for each new student account.

Many other banks put up impressive numbers. JPMorgan Chase (NYSE: JPM  ) finished in the No. 2 spot, with payments of $13.9 million going to open just 529 new accounts, or an astounding $26,000 per student. US Bancorp (NYSE: USB  ) , General Electric's (NYSE: GE  ) GE Money Bank, and a banking unit of Barclays (NYSE: BCS  ) all spent at least $1 million to gain access to college students. Of those, US Bancorp got the best bang for its buck: 7,911 new accounts, at a cost of just $316 per student.

Obviously, if card companies were willing to spend this kind of money to get college kids to sign up, they must have anticipated an even bigger payoff. And although the new credit card laws restrict activity on college campuses, they don't make it impossible to sign up students.

What the new law does
The CARD Act has a number of provisions related to students. Those under 21 will have to prove they have enough income to pay their card bills or get someone 21 or older, such as a parent, to co-sign for the card. Card companies can't offer free promotional items to complete card applications on or near campuses, and sending students preapproved credit offers has been restricted.

But that hasn't stopped some companies from finding ways to connect with college students. Card issuers are allowed to give promotional items as long as they don't make you to sign an application in order to get them. Although Citigroup (NYSE: C  ) and B of A have said they won't use this loophole, others are. In addition, Discover Financial (NYSE: DFS  ) is marketing student cards directly to the parents who would potentially have to co-sign for them.

Moreover, college students are taking steps on their own to circumvent the law. Fee-based services connecting students to potential co-signers have popped up to get cards for kids younger than 21, and in some quarters, they're just as popular as seniors who'll buy Bacardi for their freshmen dormmates.

Far from over
Although the new credit card law takes a step toward protecting college students from themselves, it's clear that regulation by itself won't completely solve the problem. It's up to parents to make sure students have the information they need to understand credit and how to use it responsibly. Without that lesson, young adults will keep getting off to a bad start with their credit.

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Fool contributor Dan Caplinger survived having a credit card at 18. He doesn't own shares of the companies mentioned in this article. Discover Financial is a Motley Fool Inside Value recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policyis the BMOC.


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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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