So Many Swamps, So Little Time

Two major scandals have roiled higher education recently.  First there was the Larry Nassar scandal at Michigan State which ended the career of former president Lou Anna Simon, who was indicted for lying to federal authorities.   MSU athletic director Mark Hollis was forced out and the school reached a $500 million settlement with victims.  At one point, bankruptcy was one of the options considered by the school.  In a real twist of irony, a female president was at the helm of an institution that failed to protect young women from an egregious and ongoing pattern of sex abuse.

Now we are faced with yet another major scandal involving wealthy individuals paying bribes to get their children into elite colleges.   Well to do actors and actresses and even the co-managing partner of a major law firm have been swept up in the sting.  Elite schools such as Yale, Georgetown, Princeton and USC are involved in a maelstrom of privilege, collegiate athletics and bribery and fraud.  What is so shocking about the sting is how widespread it is and how many institutions were involved. 

The admissions scandal, along with the MSU scandal are symptomatic of poor governance and internal controls as well as structural problems in our higher education system, particularly in the area of intercollegiate athletics.  

The breadth of the scandal points to a widespread lack of internal controls.  No company or institution can insulate itself against fraud, but lax processes and controls do invite it.  One of the points in his book Why They Do It: Inside the Mind of the Why They Do It: Inside the Mind of the White Collar Criminal by Eugene Soltis, is that opportunity itself is one of the factors that contributes to wrongdoing. Leaving the door open to the opportunity (and worse, looking the other way in the MSU case) existed in both scandals.  Alan Dershowitz commented that the admissions scandal did not hit Harvard because Harvard has a committee of 6-7 people involved in the admissions process.  So Harvard apparently has some internal controls around this.  Caught in the scandal, Yale has started this process in reaction to the scandal and has announced that it is reviewing its entire admissions protocol and athletic recruitment process.   Put another way, tuition at Georgetown is $54,000/year, making each one of those slots an asset worth over $200,000.  You would never give sole control over assets of an organization valued at seven figures without rudimentary checks and balances like dual signing authority, auditing outcomes for athletes, etc.   Clearly there have been multiple breakdowns of internal controls.

In addition to laxity of internal controls, there are structural reasons for this to have occurred.  Many of the same elements that precipitated the housing crash are at play and have festered in higher education.  Raghuram Rajan, in his acclaimed book Fault Lines, wrote of the mortgage crisis that the crisis was largely a result of people making rational choices in a flawed system.   Overcapacity and easy credit availability, along with cultural shibboleths—a college degree as emblems of status and a ticket to wealth—have provided the tinder for this crisis.  Just as easy credit inflated home prices, it has bloated education costs (most of which was in exploding administrative costs).   This phenomenon was masked for some years since parents funded college education with their home equity loans.  When home equity financing began to dry up, schools just shifted the debt burden to the balance sheets of the students.  Student debt now totals $1.5 trillion ($37,000 per student, on average).  And just as in the housing crisis, where individuals that could not absorb equity risk became homeowners, millions of young people are attending college that don’t necessarily belong there.  The consequence is the same – a bubble with a debt overhang.   The education bubble has implications for home ownership, marriage rates, and household formation.

I hate making predictions but I will make two of them.  We will see yet another scandal of the magnitude of Michigan State or the college admissions scandal within the next 12-18 months.  And over the next decade higher education is going go through a restructuring as wrenching as the one retail is going through now.

Some schools have already begun to feel the pain.  Locally, Western Illinois University enrollment has shrunk from 11,700 in 2013 to about 6,700 today.  Valparaiso University Law School spiraled downward so quickly that it was forced to close and will do so in 2020.

WordCom and Enron gave us Sarbanes-Oxley.  The mortgage crisis gave us Dodd-Frank.  Because much of higher education is and should be out of the reach of regulators, reform will need to be generated by the schools themselves.  Here are a few ideas (some of which would need to be fleshed out):

•         Like the mortgage crisis, the universities should have skin in the game.  Just as lenders retain some of the risk of making mortgage loans now, schools should retain some of the risk of loan defaults.
•         Strengthen community colleges and HBCU’s (Trump took some initiative on the latter last year).
•         Take away tax deductions for noneducational assets·  
•      Since athletic departments seem to be a place where a lot of this shenanigans occurs, tracking athletes should become a requirement for federal dollars (just as Trump talked about cutting federal dollars for schools that do not support free speech).
•         Disconnect big time athletics from education (See, e.g. Indentured:  The Battle to End the Exploitation of College Athletes by Joe Nocura and Ben Strauss). Big time college athletics is a tax subsidized and labor cost controlled minor league for the NBA and the NFL.  Let’s call it what it is.
•        Perhaps consider suspension of 501(c)(3) status for egregious violations.
• ·        Legacy, athletic, affirmative action and other favored admissions criteria need to be examined, reduced or capped.
• ·        Consider tying federal funding to staying within certain parameters of administrative expenses.
• ·        Retool universities so that education is not front-loaded but a source of lifelong skills training (again community colleges and HBCU’s are uniquely positioned for that). 

The last point is most important.  It involves changing the model to match the changing demands of the economy. 

We are in the midst of some difficult adjustments with qualifications and provisos tacked on to long held shibboleths.  Home ownership is a good thing but it is not universal for those that should not take equity risk.  Free trade is good, unless a major trading partner isn’t trading fairly and stealing your intellectual property.  College education is a good thing, except when it is systemically corrupt and creates mismatches between needed skills and the labor market and leaves kids burdened with nondischargeable and unserviceable debt.

Think of the college admissions scandal as the Lehman Brothers of higher ed or the Challenger disaster of NASA.  It is indicative of systemic imbalances and flawed incentives coupled with poor governance and oversight.  There is an old aphorism that “Once is an accident.  Twice is a shame.  Three times is a message.”  We’ve now had two.