Market failure in higher education

Rana Faroohar points to the market failure in the most competitive higher education market. She draws attention to the strong parallels between the student debt crisis and the sub-prime crisis,  

Many of the same factors are in play: a cost bubble (the price of college has increased by over 1100 per cent in the past three decades); vulnerable borrowers paying above-market rates (student loan prices, fixed by the government, have not fallen despite near zero real interest rates); corruption (scandals involving Pell Grants, subsidies for low-income students, have been rife); conflicts of interest between educators and regulators (which are predictably understaffed and underfunded); and a victim-blaming mentality when it all goes wrong. While too many students sign up for useless degrees in things like sports marketing, it is also true that they are aggressively pushed into it by both non-profit and for-profit institutions that spend an increasing amount of their revenue on marketing to students. Apollo, parent company of the for-profit University of Phoenix, which went public in 1994, at one point had a marketing budget larger than Apple’s. Colleges, too, often invest in luxury facilities to attract richer (full-fee paying) students, or, in the case of the for-profit sector, take big profits (margins typically run above 30 per cent). Students are regularly over-promised financial aid in complex deals that then change year on year, just like the subprime mortgages that blew up in 2008.

This has strong echoes with the higher education market in countries like India. The case of engineering and management degree courses are illustrative. Despite the perception of regulatory micromanagement by institutions like the University Grants Commission (UGC) and the All India Council for Technical Education (AICTE), there has been an explosive growth of seats and colleges in the private sector in recent years. Swayed by aggressive and alluring advertisements, parents have been willing to spend large amounts to admit their children. But several surveys have shown that the quality of students passing out of these colleges are so poor as to be largely unemployable and the vast majority of these professionally qualified students are either unemployed or are working in occupations which do not require such skills.

The higher education markets in US and India are excellent case studies of market and regulatory failures. The former represents the failure of markets to intermediate the desired outcomes, except in a very small set of elite institutions with long pedigrees, in a largely unregulated environment. In contrast, the latter is an example of the problems with largely mis-directed and highly intrusive regulation, whose flaws get compounded by pervasive corruption and its very weak enforcement. The two cases while reinforcing the point about market failures in higher education, also highlights the importance of getting regulation right.