Sun | Dec 5, 2021

Walter Molano | Scratching the surface

Published:Thursday | April 18, 2019 | 12:22 AM


Today, we remain off-piste, treading in another non-market topic.

Last month’s college admission scandal in the United States raised hackles from coast to coast. It suggested the spectre of corruption in one of the last-remaining sacred hallows of American culture.

With the US presidency, the press and even the Church, in flames, academia was one of the last bastions of integrity and honesty. Unfortunately, the scandal has ripped the cover off a medieval system that is rife with corruption and in desperate need of reform.

While the focus has been directed at the 50 individuals implicated in the FBI investigation, there has been very little focus on the admission system, which is full of loopholes and opportunities for arbitrary decisions.

Not only are there front doors, back doors and side doors, there are windows, wormholes and crawlspaces that provide access to top-shelf universities. Many parents know that the front-door is basically a lottery, where a heart-wrenching essay can compensate for ridiculously low SAT scores or academics.

Moreover, once you get into one of these institutions, it’s almost impossible to fail out. The grade inflation that started with the Vietnam War never stabilised. Furthermore, these schools enjoy unlimited, a.k.a. monopoly, pricing power.

There is no elasticity of demand. That is why tuition costs have outpaced inflation for decades. It is also why the upper economic classes disproportionately represent the student body. In order to keep upward pressure on prices, universities turned to the global marketplace.

While the US represents 5 per cent of the global population, American students now has to compete with 19 times the competition.

Today, there are 1,078,822 foreign students enrolled in US universities. It is a number that doubled in the last decade. Most of these applicants are willing to pay full-freight, giving them an edge in the application process.

Total costs for foreign students tend to be multiple times higher than US students, creating a cash cow for the universities. Furthermore, developing countries are chocked with admissions services that help applicants navigate the US university system. Some of them complete entire applications, even essays, and there are multiple press stories of ringers being used to take entrance exams.

Even though these prestigious US schools are part of the Americana folklore, they are completely off-limits to most of the population. The real beneficiaries of this incredible rise in tuition are the university administrators — not the professors. The numbers of deans and provosts have exploded across the academic spectrum, with some schools boasting more administrators than professors. Senior administrators tend to command six-digit salaries, way above the salary of a typical professor.

In order to justify the increased tuition costs, all US universities have embarked on extensive modernisation campaigns — each trying to outdo each other in converting their campuses into luxury spas. At the same time, lecture halls become larger. Adjuncts and teacher assistants take on more teaching responsibilities, and the numbers of professors shrink.

However, technology has stolen a march on these institutions, and it is only a matter of time before universities price themselves out of the education market. Companies, such as Pearson, McGraw Hill and Vista, are producing a vast array of interactive learning products that are standardising the quality of education at the highest levels. At the same time, the costs of providing the online courses are a sliver of the typical university enrolment fee.

Matriculation at community colleges is exploding, as a way to defray the massive tuition cost, slashing the price of a four-year education in half. As education companies turn to the top leaders in each academic field, students across the world will have access to the latest theories, concepts and techniques.

Of course, they will miss out on the socialisation that takes place on campuses, but given the incidents that are constantly in the press, it is better that they just stick to the academic part of the education process.

The recent admissions scandal has tainted the lives of a few dozen individuals, but it has also allowed brought to light the vast problems that lie below the surface. Like most other industries, the university system is a for-profit organisation that creates distortions in order to maximise its members’ welfare.

However, like any other organization with monopoly pricing powers, it is subject to abuse. Therefore, it requires government oversight and regulation.

The public sector needs to introduce measures that will increase the transparency and fairness of the admissions and education systems, before the market makes universities obsolete and the country loses the positive externalities, such as R&D and technology, associated with institutions of higher education.

Dr Walter T. Molano is a managing partner and the head of research at BCP Securities LLC.