His hypothesis is that increasing the capacity of students to pay (to almost arbitrarily high levels) by providing government guarantees of student loans allows allows schools to charge ridiculously high tuition. To some extent, this is correct, and there is no reason for the people involved not to want to increase tuitions. For the school, higher tuition will mean the school can improve itself and become more attractive to students. For the lenders, higher tuition means more loans returning 5% or more for which the government assumes all the risk.
It isn't entirely accurate to say "the government assumes all the risk" either. Student debts are the most toxic debts around, and cannot be thrown off in bankruptcy. If you refuse to pay, the government is authorized to garnish your wages or raid your savings.
This isn't to say that Schiff's hypothesis explains the entirety of the increase in the cost of tuition, but I think that it plays a much larger role than what is discussed in the article.
This seems to be a much better explanation than the article provides, which seems to be along the lines of "the smart people teaching in college must be paid a lot."
The answer to the question posed by the headline is: It isn't. The correct question would be "Why does College cost so much IN THE US?," which implies there's a fundamental difference between the higher education system of the United States vs. that of a large part of the world.
You COULD claim that professors in other countries are being paid ridiculously low wages, but this sounds far fetched. A much more convincing explanation, in my opinion, would involve the difference in the way the economy of higher education works in the US versus other parts of the world.
The schools are also making a money grab due to the availability of money. The university I am enrolled in said they will have to raise tuition "drastically" because the state will only give them $125mil vs. $150mil due to cuts. I checked average salary of administration positions, 130k in 2006 and 230k in 2010. Also, they have built two buildings last year and have two more going up this year. Obviously, nothing can be done but hiking tuition.
I think that it is one of the driving factors, and that the experience of the housing bubble confirms it. I live in sleepy Albany, NY, which as a state capital and small city it is a pretty stable place. No boom-bust cycles at all -- it's always "ok" in the region as a whole.
House prices that were stable from the mid 80's to 1999 suddenly went mad, up to the median income in the area for the legions of state workers. If you tried to buy a $200k house, there would be a bidding war minutes after the sign went up... but not much above $250k.
A corollary is that schools have packaged loans as financial aid. Financial aid representatives sell loans to students as if they reduce cost. They mask the true cost which preserves demand and therefore price.
>"For the lenders, higher tuition means more loans returning 5% or more for which the government assumes all the risk."
5% is a typical origination fee for an educational loan. The lender takes it off the top. Interest on educational loans - since loans to parents and relatives are a big part of the business - can run quite high for non-government backed loans (9%-11% was not uncommon for loans written in the 1990's).
Focusing on traditional educational loans (Stafford, Plus, etc) misses the other big form of educational borrowing - credit cards. Perhaps this has declined with the recent downturn, but from the late 1980's credit card companies increasing targeted students, and it was not uncommon for people to graduate with $3000-$12,000 in credit card debt in addition to student loans. [and it has also become a more difficult debt to discharge through bankruptcy]
http://www.youtube.com/watch?v=AIcfMMVcYZg#t=1m30s
His hypothesis is that increasing the capacity of students to pay (to almost arbitrarily high levels) by providing government guarantees of student loans allows allows schools to charge ridiculously high tuition. To some extent, this is correct, and there is no reason for the people involved not to want to increase tuitions. For the school, higher tuition will mean the school can improve itself and become more attractive to students. For the lenders, higher tuition means more loans returning 5% or more for which the government assumes all the risk.
It isn't entirely accurate to say "the government assumes all the risk" either. Student debts are the most toxic debts around, and cannot be thrown off in bankruptcy. If you refuse to pay, the government is authorized to garnish your wages or raid your savings.
This isn't to say that Schiff's hypothesis explains the entirety of the increase in the cost of tuition, but I think that it plays a much larger role than what is discussed in the article.