Student loan company Sallie Mae in October launched three cash-back credit cards aimed at students and recent graduates with loan debt.

The cards are designed to promote financial responsibility, but the effort and its timing raise questions of responsibility in another vein — namely, whether the company is taking advantage of a segment of borrowers that, as a result of law, has become more underserved.

The CARD Act of 2009 requires anyone under 21 to have a cosigner such as a parent, or be able to prove an independent means of repaying any debt incurred. That curtailed major banks’ efforts to target students with revolving credit lines. With less competition from banks — and brand recognition from students who have already agreed to loans with the company — Sallie Mae is in a position of power.

"They probably have a sort of captive audience, which they are looking to capitalize on," Linda Sherry, director of national priorities at the watchdog group Consumer Action, told Banking Dive. "If this is the only card that will approve an applicant, then it might help those who can’t get a bank card elsewhere. The crossover with cash rewards for paying down a student loan might be attractive to borrowers."

The problem may come when a student already struggling with loan debt may be tempted to use the credit card to pay off loans and, in the end, owing more.

"It potentially sets up a lot of problems," said Whitney Barkley-Denney, senior policy counsel at The Center for Responsible Lending, according to USA Today. "It’s mind-blowing that a solution from a student lender to the financial problems of young adults is more debt."

The products

The three cards have no annual fee and an initial 0% introductory offer, but the future annual percentage rate will range from 14.99% to 24.99%.

• The base-level card, Ignite, offers 1% cash back on purchases plus a 25% bonus on cash-back rewards after six consecutive on-time payments.
• A second, Accelerate, gives 1.25% cash back on all purchases plus a 25% bonus when consumers use their cash-back rewards to pay down their federal or private student loans.
• Lastly, Evolve offers 1.25% cash back on all purchases, plus a monthly 25% bonus on cash back rewards in a user’s top two purchase categories.

Rick Castellano, Sallie Mae’s spokesman, said the student lender conducted a year of research and focus groups before launching the cards, and in fact, co-created them with students.

"Our priority is to help students build credit responsibly and reward them for it," Castellano told Banking Dive in an email.

Brian Karimzad, vice president of research at LendingTree, said the cards can serve as a valuable introductory experience but have their disadvantages, too.

"For students first getting their feet wet with revolving credit, the possibility of a lower APR is an extra guardrail," he told Banking Dive. "Recent college grads who have a year or two under their belt of on-time payments should feel confident they can seek out cards with some of the best rewards, and not limit themselves to cards from brands that were willing to approve them for their first card in college."

Karimzad suggested re-evaluating credit card benefits annually, adding, “there are dozens of cards that offer 1.5% or better cash back with no annual fee from other issuers."

Reinforcing responsibility

Castellano reinforced his company’s commitment to responsibility.

“The provisions in the CARD Act are consistent with our philosophy of responsible lending,” Castellano said. “We take many factors into consideration when making a credit decision, including the ability to repay, as outlined by the CARD Act.”

At the same time, Sallie Mae is also offering Ignite and Accelerate cardholders the chance to win $10,000 to pay down any of their student loans as part of a sweepstakes taking place each month for a year.

In another move last week, Sallie Mae said it plans to restrict its use of forbearance to keep borrowers with private student loans from going long periods of time without making any payments, according to American Banker. Those who have gone into forbearance at least once will have to wait six months before doing so again.

The student lender also said it plans to launch a program to let certain delinquent borrowers make interest-only payments for up to six months. The company said it expects the actions to accelerate loan defaults.