A federal law intended to curb the marketing of credit cards to college students may be inadvertently pushing them to take on more student loan debt, particularly among less affluent students, according to a new working paper.
The report, which was conducted with the support of financial aid offices of Texas A&M University, aims to provide a clearer understanding of how regulations on the exposure to credit cards among college students affect student loan borrowing, and whether such a policy was beneficial to vulnerable borrowers.
The passage of the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009 restricted the marketing of credit cards on college campuses which has, in recent years, guided students away from obtaining them but has not explicitly prohibited their usage. Overall, the study determined that nudging students away from high interest credit cards raised student loan balances by 8.4% on average per year ($208), and by 15% among less affluent students.
"For students in need of liquidity, the most easily available alternative is a student loan. It is not obvious that a student loan is always cheaper. Cards provide a flexible line of credit. A student loan, while nominally carrying a lower interest rate, is less flexible. For some students, this inflexibility may make a credit card the lower-cost option,” the authors write. “Which option is lower cost depends on how aptly students make financial choices, the uncertainty of their expenditures, and the relative cost of student loans."
The researchers sought to analyze how an unintended consequence of the policy, an apparent increase in student loan debt due to the nudge away from credit cards, would impact students’ financial well-being.
“To assess the benefits of this substitution, we design a survey that reveals significant sub-optimal financial decision-making among students tied to higher card debt,” the paper explained. “We provide model based evidence showing this implies the policy raised welfare. We also document higher grade-point averages and on-time graduation rates resulting from the policy.”
The paper provides a detailed explanation of what impact credit card restrictions have on overall student welfare, which according to the authors indicates that students have benefited from the current limitations.
The study dug into how the law caused students from the least affluent zip codes to seek out student loans for financial expenses and how those lower interest rates made expenses like textbooks and rent more affordable than the high interest rates associated with credit cards.
“A nudge to borrow not on credit cards, but student loans, generally benefited them,” said Alexander Brown, an author of the study. “If, instead, most students had already exhausted their student loans, or needed a financial vehicle that gives immediate liquidity to cover emergencies, credit cards might have been the better choice. In such a case, students could have been harmed by this nudge. The data suggests the benefits outweighed the harm in this particular instance.”
Publication Date: 7/29/2022