On Monday, interest rates on subsidized Stafford loans for students doubled from 3.4% to 6.8%. More than 7 million students in the United States are projected to take out subsidized loans for the 2013-14 academic year, and it is estimated that the rate hike will cost students an additional $1,000 a year.
With great timing, Gawker on Monday also revealed that former CIA director David Petraeus will earn a whopping $150,000 a year from the City University of New York, where he will teach a seminar that meets once a week. On top of this, according to an email from CUNY chancellor Matthew Goldstein, the stipend will be "supplemented by funds from a private gift," and CUNY "could also provide limited additional funds for travel to professional meetings as a representative of CUNY."
What's worse, the $150,000 CUNY is offering is already much lower than what Petraeus is being paid by colleges elsewhere, according to Petraeus himself. In his "acceptance letter" to teach at CUNY, Petraeus writes to dean Ann Kirschner, "The truth is I could have gotten more money or more prestigious places (you won't believe what USC will pay per week) ..."
Which begs the question: as more and more students take out loans to finance higher education, is this kind of thing why colleges haven't lowered their costs?
A 2011 Pew survey shows 57% of Americans says the higher education system in the U.S. fails to provide students with good value for the money they spend, and 75% says college is too expensive for Americans to afford. That is not to say, however, that college isn't a good idea, as indicated by the fact that millions of Americans take out student loans to finance their higher education despite its costs. But college (around $25,000 for private, $7,200 for public) is just too much.
Bloomberg also found that between 1978-2012, higher education costs rose by 1,120 percent, four times faster than the inflation rate. "For millions of young people, rising college costs are putting the American dream on hold, or out of reach," said Senator Tom Harkin (D-Iowa).
Yahoo News's Liz Goodwin outlines two economic theories behind this, the "Bowen Rule" and "Baumol's cost disease." While the former attributes the costs to the "decisions made by many colleges and universities ... how many administrators to hire and how to spend its cash" (e.g. on David Petraeus), the latter claims the costs are due to external macroeconomic factors, in particular the rising salaries of highly educated workers even in fields that have not experienced productivity growth. Similarly, Forbes's Pascal-Emmanuel Gobry posits that American universities adhere to the "classic business model of high fixed cost, low marginal cost businesses," and will charge as much as their students can pay.
So here's what to take away:
(1) 1. The reason behind rising higher education costs is an enigma and continues to divide economists, but the recent revelation of Petraeus's salary from CUNY serves as a good indication.
(2) 2. Despite rising costs, students still want higher education, hence millions take out student loans every year.
(3) 3. To fix this system, Congress must come up with a compromise to lower interest rates ASAP. But this would only address the symptom, not the problem. In order to make the future of higher education sustainable, costs of higher education must be alleviated both ways: not only should students receive help from the government, but colleges should also lower their rates to make themselves more affordable.