Let’s commend Minnesota Attorney General Mike Hatch for raising the issue of abusive credit card lending to college students. What he can do is limited, but Congress should pick up the ball.
The problem of college students digging themselves into deep holes illustrates the practical difficulties of deciding when people are responsible to make decisions. Obviously, we don’t let 12-year-olds drive cars, buy booze or firearms, or take out big loans. We let 25-year-olds do all these things. At what age should no become yes?
As a practical matter, governments have to set arbitrary ages — 16 for driving, 18 for voting, 21 for drinking and so forth. Some kids handle new responsibilities capably, others not.
Historically, lenders avoided young adults. However, as credit cards were marketed to increasingly broad groups of consumers, card marketers found profit in issuing cards to college students.
Families found them useful for students to fly home for holidays and to deal with emergencies like towed cars. While many students overspent and had trouble making payments, others did not. Collection costs and loan losses were higher lending to college students than to older people, but not prohibitively so.
So, one might ask, what’s the problem? Rational adults use a legal product that fills a legitimate need. Yes, some wobble a bit before learning how to use credit wisely, just as they err initially in responsible alcohol use or even driving. This is no justification, however, for government regulation of the product.
College counselors and bankruptcy attorneys paint a different picture. Only a minority of students get into bad credit trouble, but the numbers are growing. Moreover, increasing numbers of predatory lenders identify students already in trouble and offer to roll their existing arrears into a new account with low minimum payments but with extremely high interest rates.
Hatch is justified in raising the problem as a policy issue.
If nothing else, it deserves some study by the Federal Reserve or other regulators. Hatch’s suggestion of limiting payments to colleges for special card marketing rights to their student bodies deserves consideration.
Another suggestion is to create a special low-cost bankruptcy procedure for debt incurred by young adults. Call it Chapter 22. It would allow easy write-off of unsecured debt entered into before one’s 22nd birthday.
Student loans and secured debts, such as auto loans, could be excluded along with the first $2,000 or so of unsecured consumer debt. Unsecured debtors would be ranked by the date they first extended a credit limit. Those who issued a new card when a student already had one would get little protection.
Opponents will argue that adopting such a Chapter 22 bankruptcy option would sharply limit offers of credit to those under 22. That is precisely the point. Students could still get cards to pay for holiday flights home and textbook purchases, but no one would lend them large sums of money until they were 22.
© 2003 Edward Lotterman
Chanarambie Consulting, Inc.