On Tuesday March 12th, the US Attorney for the District of Massachusetts announced a sweeping indictment regarding a college admissions bribery scandal. Dubbed Varsity Blues, it was an eleven month investigation that examined corrupt admissions practices between 2011 and 2018. The school administrators and coaches that received the most money were from the University of Southern California, Georgetown, Yale and Stanford. In total, there are thirty three parents caught up in the dragnet. Central to all of them is the so-called college admissions consultant Rick Singer, who received a total of $25 million from the parents, which ranged from $100 thousand to $1.2 million. The money was used to bribe coaches such as Yale’s women’s soccer coach, USC’s rowing coach, administrators, and SAT and ACT test proctors.

Merit for Thee, But Not For Me

Fraudulent test scores, athletic achievements, and applications were the tools of the trade. It should be noted that none of the institutions involved were charged, only a few minor actors. However, it should also be noted that there is nothing new about well heeled donors greasing the palms of their university’s endowment to get little Johnny or Suzy admitted as a legacy. The parents in this scandal are largely Hollywood and corporate elites, and the schools are also east coast and west coast elites. Very predictably, all of them are fellow travelers in the progressive left’s equality-by-government-force parade.

The charges levied by federal prosecutors are but a drop in the bucket of the massive fraud being perpetrated by the entire public university system, and it has been going on for decades. The wonderful consequence of this scandal is that it is shedding light on what are hedge funds that happen to have a faculty and old ivy covered buildings. The source of the fraud can be simply attributed to third-party payers, mostly government. This means that there is no efficient price mechanism for tuition and fees. There is no market consisting of entrepreneurs to maintain the integrity of the higher education product. As economics professor Richard Vedder explains in his book Going Broke by Degree:

The impact of third-party financing of education is to move demand curves to the right, raising tuition. This is particularly true of scholarships and loans to students. A Pell Grant or a Stafford Loan increases the student’s ability to pay any given amount in tuition.

A good place to start is the Free Application for Federal Student Aid (FAFSA). The application is a ten page financial colonoscopy, and its objective is to calculate the Expected Family Contribution (EFC). This is the government telling you what you should be paying. If it is determined that the student has a “need,” they can make applications for a Pell Grant, an FSEOG grant, a Stafford Loan, a Federal Student Loan, or the Federal Work-Study Program. If the applicant’s household income or college savings exceed some arbitrary threshold because of diligent work and long-term planning, both noble pursuits, they will be penalized.

Pay the Toll to the Troll

When a university publishes its tuition rates, it is a totally bogus number, much like health care pricing (and for the same reason). For students that qualify for scholarships, financial aid, or grants, the price is much lower, as is the true cost of actual instruction. And the availability of federally guaranteed student loans distorts the pricing mechanism even more. But this is not the big scandal. College administrators, and to a lesser extent college professors, are looting this system for their own enrichment, and it is even worse at so-called research universities. As Vedder explains,

Public choice theorists suggest that nonprofit organization employees try to maximize their satisfaction in life, and they use their power accordingly. As incremental resources become available to universities, administrators have allocated more funds to themselves, providing more administrators to ease their burdens and perhaps raise their own salaries.

For example, between 1977 and 2000, public university expenditures for administration, research, student services, and fellowships increased to 46% from 39% of total expenditures, and expenditures for instruction and plant operation fell to 41% from 48% of the total. In many cases, dormitory and classroom buildings are being neglected in favor of luxury recreation and food service facilities. This is where colleges compete, not on quality of educational product or price. Another problem is that a university’s research accomplishments are measurable and recognized quickly, not so much for instructional excellence, so there is an incentive for undergraduate tuition revenue to fund research instead of instruction.

As Vedder points out, “A big part of the problem is what the great Austrian economist Ludwig von Mises, in a slightly different context, once called the calculation problem. Where profits are not pursued as the primary institutional goal, it is difficult to measure success and failure.” He goes on to explain why universities won’t reduce costs and prices to become more competitive.

First of all, the strategy of cutting administrative costs would meet with some opposition within the university community, especially from top-level administrators. Second, the university president who did this might be ostracized by fellow presidents, who meet regularly at the American Council for Education, a practice that might be considered a violation of anti-trust laws.

As former Secretary of State Henry Kissinger once proclaimed, “University politics are so vicious because the stakes are so small.” But the stakes are huge for the rest of us.

The  Private Sector Solution

Because of the rapid increase in college pricing, there has been a proliferation of for-profit alternatives. These include Phoenix University, Strayer Education, and DeVry University. There is also renewed interest in two-year programs and the kind of vocational training being promoted by Mike Rowe of Dirty Jobs fame. Not only have universities corrupted themselves with worthless academic programs that end in the word “Studies,” they have no skin in the game. Today’s millennial generation has accumulated over $400 billion in student debt. Welcome to March Madness.

But private for-profit schools should also be scrutinized for their reliance on government loans and grants. A private equity firm CEO that specializes in alternative low-cost quality education was trying to partner with a public university, and have a presence on their campus. He was rejected by a senior administrator whose rationale was that he was a mercenary. In the academic community, for-profit is evil, the administrator’s lavish compensation package notwithstanding. When asked why he wanted to do business with a public university in the first place, his answer was “that’s where the money is.” A pristine example of how fractional reserve banking perverts entrepreneurial incentives.

Thanks to last week’s college admissions scandal, the four year college rip-off is getting some badly needed attention.