Letter to the Editor: CMU Tuition
Roosevelt Institute @ CMU
With a six-year cushion, it is tempting to look back on the Recession of 2008 as an old injury, one that is healing well as unemployment rates drop, the housing market improves, and private-sector jobs expand. All these improvements are due in large part to the 2009 American Recovery and Reinvestment Act. That progress is undeniably promising, but there are parts of the economy that have remained largely untouched by the recovery — such as the infinitely ballooning price of college education.
Tuition at Carnegie Mellon has increased nearly $10,000 since 2010 , and while the university cites projects such as The Sherman and Joyce Bowie Scott Hall and the University Center expansion as key factors, there are other mechanisms at work. The Roosevelt Institute at CMU, a student-run branch of the New York City based Roosevelt Institute has found that Carnegie Mellon has lost over $39 million in interest rate swap deals since 2004. To put that figure into perspective, that’s enough to pay for the tuition of almost 200 students for four years of undergraduate at Carnegie.
Interest rate swaps are fittingly named. A swap deal occurs when a firm takes out a loan or bond and chooses to swap the variable rate on its interest payments for a fixed rate. For example; Carnegie Mellon took out a $100 million loan in 2006 for help funding construction and refunding its previous debts. The university chose to pay a fixed monthly interest rate of 3.4 percent rather than paying a variable rate that would fluctuate with the market. This was before the recession, when banks were telling investors that interest rates were going to increase. So swapping no doubt seemed like a good way to save money.
Unfortunately the crash happened, and interest rates fell. Because of the swap agreement, CMU was locked into its fixed rate and ended up paying a much higher monthly interest rate than the market rate, which collapsed alongside the rest of the economy. A move that was initially intended to save the university money has ended up costing $24 million — and the deal doesn’t end until 2028.
This arrangement worked out nicely for the university’s counterparty, PNC Financial Services. Though the 2008 recession took many by surprise, there are those who think some bankers knew it was going to happen, and saw potential profit in swap deals. Regardless of whether or not they were aware that it was coming, banks were the ones responsible for the 2008 crash. The swap deals that many universities have undertaken at this time proved to be bad deals across the board, and universally beneficial for the banks. It begs the question: should bankers be more transparent regarding their beliefs about the future?
The answer is obvious. Financial institutions are legally obligated to relate pertinent information to their clients in order to avoid this very issue, and should be held accountable when they make profits off of the money we pay our university. We ask this of our institution: make better decisions so as to keep that money where it belongs.
And of its financial partners: respect the integrity and fairness of partnership so that we may secure a viable financial future for our university.