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Selling Out Students When State Support Drops

April 15, 2008 - 9:35am

Falling state support for higher education has a number of onerous effects: increased tuition and fees, more student debt, and a greater likelihood of scaring away low-income students. Less examined is that lost state revenue has driven many public universities and state colleges to find new and previously untapped funding sources - even ones that have dangerous repercussions for their students.

Despite nearly a half decade of solid economic growth, aggregate state support of higher education funding has fallen by 7.8 percent over the past five years in real terms. But the average obscures the wide variability among states. For example, in states such as Alabama, Hawaii, and Wyoming, appropriations per full-time student increased by at least 20 percent. The flipside, of course, is that states such as Colorado, Minnesota, and Vermont all have seen their appropriations decrease by 25 percent or more.

Public colleges typically react to funding cuts by hiking tuition. This certainly has occurred - overall tuition revenue per student at state colleges has risen 24 percent over the past half decade, according to a recent report by the State Higher Education Executive Officers.

But tuition isn't the only revenue stream colleges tap. The most obvious is a turn to increased fundraising efforts. For example, flagship campuses in Michigan, Florida, and Virginia have launched billion dollar-plus campaigns over the past few years.

Many public universities and state colleges have also looked to the private sector for support, striking lucrative deals with corporations eager to reap the benefits of gaining access to a captive student audience.

Some of these deals -- stadium naming rights, athletic and event sponsorships -- are relatively innocuous. But others are far more treacherous, with universities essentially leaving their students prey to credit card companies and other financial institutions that agree to provide them with a cut of the profits they make off their students.

These credit card deals and other types of arrangements, in which colleges convert campus ID's into ATM and debit cards by outsourcing them to banks, expose the dangers of the privatization of public higher education. Instead of looking out for their students' best interests, these schools have been focused on finding ways to make additional money off of them.

Credit Cards

Under these deals, colleges provide credit card companies with personally-identifiable information about their students in exchange for cash payments. The companies then use the data - which can include permanent addresses, e-mail addresses, and local telephone numbers - to market credit cards directly to students. Some colleges go even further, providing these companies with face-to-face access to students -- allowing salespeople, for example, to set up marketing tents in central campus hubs. And the credit card companies often provide a share of the money they earn on students' credit-card purchases to the colleges, their alumni assocations, or their athletics departments.

Unsurprisingly, the easy access to credit cards has led to high levels of debt among many college students. A recent report by the federation of Public Interest Research Groups (U.S. PIRG) found that roughly 66 percent of college students had a credit card, with 34 percent of those individuals (or around 22 percent of all students) carrying a balance on the card. While the average card balances don't approach private loans, they could be quite high - as much as $1,301 for freshmen and $2,623 for seniors. Those with student loans or previous credit card defaults had even higher average balances.

ID Cards

Under these arrangements, colleges outsource the creation of student ID cards to banks, which transform them into ATM and/or debit cards. The agreements are a win-win for the colleges and banks that participate in them. Banks produce the cards, which students can use both to access checking/savings accounts and as a debit card. In return, schools get the cards for free and receive annual payments from the banks. In some cases, colleges also receive a percentage of the balances held by students.

The deals are quite profitable for both partices. An ID card deal between the University of Minnesota and TCF Financial has yielded an estimated $40 million over 30 years for the school, while the bank's deposits have increased by $50 million.

The benefits to the student are less clear. Students at some schools that participate in these programs have complained that they have essentially been forced to sign up for the card, and have been hit by substantial overdraft fees for negligible purchases. The personal information students give up by activating the card also makes them prime targets for further offers, especially credit cards.

A Common Thread

The deals that public universities are making with banks and other finance companies for credit cards and ID cards bear a striking similarity to the deals that were uncovered last year as part of the invesigation into the "pay-for-play" student loan scandal. Just as exclusive deals between lenders and colleges drew Congressional ire, policymakers need to take a closer look at schools' revenue machinations and their implications for students. In future posts, Higher Ed Watch will review the credit and ID card deals in greater depth and discuss ways to protect students.

In the meantime, Congress can take an important step and include a provision in the final version of the Higher Education Act Reauthorization legislation that is currently being drafted that would penalize states that reduce spending on higher education. Perhaps if states are forced to maintain a reasonable level of spending on their colleges, the institutions would stop being so willing to sell out their students to the highest bidder.