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New Credit Card Law May Have ‘Unintended Consequences’ For Low-income Students Law that addresses problematic credit card industry practices presents barriers for students who rely on credit cards for school.

College students who lack a financial safety net to assist with education expenses might experience some difficulty accessing credit when a new law signed by President Barack Obama last month goes into effect in February 2010.

The new law, “Credit Card Accountability, Responsibility and Disclosure Act of 2009,” has many provisions that specifically target young collegians. Title III of the new legislation aims to protect young consumers by requiring students under 21 to have a co-signer, show ability to pay monthly bills or prove that they have completed a financial literacy course.

Nearly 80 percent of American families have credit cards, paying about $15 billion in penalty fees annually. The law is designed to foster more “transparency, accountability, and mutual responsibility,” according to the White House. For example, the law requires advance 45-day notice on APR increases and that statements tell credit card holders how long it will take to pay off a balance and what it will cost in interest if they only make the minimum monthly payments.

While the legislation is protective in nature, it presents several risks and “unintended consequences” for vulnerable students, says Karen Gross, president of Southern Vermont College in Bennington, Vt.

Gross, who directs New York Law School’s Economic Literacy Consortium, says that while the law’s provisions generally address practices that are problematic in the credit card industry, such as sudden interest rate increases, the law presents barriers for students who rely on credit cards to “even cash flow during the beginning of the semester and during semester breaks.” The former law school professor, who specializes in consumer finance and asset building in low-income communities, contends that student credit card debt is rising because students are using credit cards to close the educational gap as the cost of college tuition continues to rise — not because students are abusing credit cards to pay for leisurely items.

About two-thirds of college students have at least one credit card, and about 24 percent have used their cards to help pay tuition, according to a U.S. Public Interest Research Groups (US PIRG) report.

A recent Sallie Mae study found that college seniors graduate with an average of $4,138 in credit card debt, while freshmen have an average of $2,038 in credit card debt.

The law presents a problem for vulnerable students because they are less likely to have parents who will co-sign on a credit card application, Gross says.

At Gross’ school, which has the second highest percentage of minority students in Vermont, many students use credit cards while waiting for loans and other monies entitled to become available.

About 80 percent of the school’s 500 students receive financial aid with the average aid package providing about $14,000 a year in aid.

Gross says keeping low-income students from having credit cards will limit their access to the credit market, which creates a larger issue.

“We don’t want vulnerable students to miss out on the opportunity to get good credit scores,” Gross says, adding that many employers and insurance companies look at graduates’ credit scores.

A 2007 report from the think tank The Center for American Progress found that most frequent denials of credit because of race and ethnicity occur with credit card applications. In addition, the report found that those low-income families are more often denied access to credit than middle- and higher-income families even when low-income families apply for credit in line with their income and credit scores.

However, José García, associate director for research and policy at Demos, a New York City-based public policy research and advocacy organization, says the new regulations may not result in minority families having less access to credit. There are other avenues in which Black and Hispanic students can obtain credit, he says, noting that “credit unions are better at assessing risk and at the same time, providing good interest rates.” The credit card reforms are necessary and can be particularly advantageous for people of color, he says. Credit card-holding Black and Hispanic families tend to have high levels of debt.

“These groups are more likely to be using credit cards to pay for necessities and not leisure trips. They represent a population who has high debt compared to their income,” says García, co-author of Up to Our Eyeballs: How Shady Lenders and Failed Economic Policies are Drowning Americans in Debt. He notes that lenders tend to extend more risky credit, which includes higher interest rates and more fees, to minorities and low-income individuals.

Ultimately, when it comes to paying for college the financial aid system should do more to cater to needy students, he says.

“I think these students in general should not be looking for credit cards to pay for those bills,” García says. “We need to move out of these debt-based ways to pay for higher education.” D

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