Monday, May 07, 2007

Rich Kids and Scholarships?

[ I extended my highest gratitude in advance to a junior of mine back in A Level College whose the writer of the blog for allowing me to post this article ]

Why rich people still take scholarships although can afford not to?

Firstly, my intention is not to stir a controversy or create a conflict but it is to rationalise rich parents' decision on their kids taking up scholarships.

DEFINITIONS: My analysis will centre around 'rich' people who can afford to send their kids to overseas universities and can do so without any scholarship. Their 'kids' are people who undoubtedly have the merit to qualify for such a scholarship. The 'scholarship' is also one which entails an employment bond with summons if bond is broken.

So… why? If I was rich, lets call me Tan Sri Tengku daNN, I wouldn't want my kids to enter a scholarship contract if I can afford to pay for their education. Because later on, they would have to serve a very long bond, twice the average employment period in a private sector firm, with low salary. I would rather have them work for pure private firms, rather than government linked ones. Besides, my kid is a graduate from a top university with a top degree. Which employer wouldn’t want him/her? Unemployment is out of the question in this model.

Well… Theory 1 (which I think is the coolest): When bond is broken, summons paid to sponsor is exactly the nominal amount sponsor paid for education (half a million RM). So, the sponsor breaks even, in nominal terms. Fair enough.

But does it really break even? As a finance guy, I would say 'Hell No!'. The sponsor actually loses a significant amount of money. It forgo on the time value of money (it could have used the money to invest in a project) and it loses in real terms, because of inflation, but the time value of money is of course, a greater factor. Half a million ringgit worth of scholarship could have at least yielded an extra RM 55,000, interest compounded on a yearly basis for 3 years (equivalent period for university degree) at the most basic Bank Negara interest rate of 3.5%. So, a rich person, by telling his/her child to take up a scholarship, and then breaks the bond, actually earns a cost saving on the time value of money. It’s like a loan of RM 500,000 but without any interest. And when paying the summons, since the Future Value of a ringgit is more than the Present Value of a ringgit, and the summons is paid in the future, the Present Value of the summons settlement is in fact, less than the cost of education because the money used to pay for the summons could have earned interest for 3 years. Instead of putting aside RM 500,000, you only need to put aside RM 451,000 max, discounted using Bank Negara's OPR (basic interest rate).

That is super smart, in a finance-savvy kind of way. Which is a cool analysis, especially for finance people and economists since it assumes rationality, which is a sensible assumption.

Theory 2: Getting a scholarship is a Value in our society. It earns prestige and status. By having a scholarship, it 'signals' you’re smart or whatever (caveat: not always true). Time value of money doesn’t matter. This is a typical Sociologist's view.

Theory 3: Stingy parents. Want to save money just for the sake of maximising personal wealth without wanting children to have a better career. Can't rule out this possibility.

I am a profit maximising capitalist. I believe more in theory 1. Based on this premise, there could actually be huge policy implications. Firstly, to avoid this sort of 'rent seeking', sponsors should charge interest on defaulted bonds. The cost of default would increase and there would be less default. People who can afford, will no longer take up the scholarship (given the Present Value cost of default is greater than the Present Value cost of self sponsoring) and this leaves room to more working class, middle class and kampung people, who on average won't default because they can't afford to. This will then not only reduce the income gap but also sponsors make a 'Return on Scholarship', which is good for Wawasan 2020.So, tell me what do you think? Especially if your parents can totally afford but still signed your scholarship contract.But for now, don’t suggest sponsors to hike cost of default because I might want to consider doing that. Haha! Kidding. Actually, my rich friends might kill me.In my opinion, given Theory 1 holds, it is not wrong for rich kids to receive scholarships (given they qualify on merit) since it is actually the most rational and cost-minimising strategy to take. - daNN

[ Dann is an Accounting student in London School of Economics ]


shein said...

i totally agree with point 1 - but then again could it also be these "rich kid's" (as you so call them) might be under scholarship due to the fact that their parents want them to earn their own respect rather than buy it with their parents money. What i mean by this is that maybe their parents just want them to learn how to deal with pressure of paying the loan back or working in the governmental department in order to see what life is outside mommy's and daddy's posh world.I am sure their parents must have gone through a lot to achieve the rate of success they have now, so why should their kids take the easy way out rather than learning the true value of their education? :)

lala said...

well.if u are a pure capitalist, u would say that those who pay more taxes, contribute more to the country and deserve to get something in return such as scholarship for their children. the scholarship that worth rm500,000 might be nowhere near the amount of taxes that they had paid to the governmant.

Secondly, i think most of the GLCs award scholarships to invest in their future workfoce rather than social obligations(except MARA and JPA).They don't mind awarding scholarships to rich kids as long as they get good results and come back home as good employees in 3-4 years time.

In terms of moral and logic, who are more entitled to a sholarship? A middle-class kid with 5A SPM results or a rich kid who has outstanding personality and obtained straight As in the SPM? Maybe it's unfair for rich kids to take the scolarships, but it's also unfair if someone without merits used his 'middle class' reason as his easy way to success.

Sharazad said...

you have the points :)

Ainul Hafiz said...

daNN's words are as good as before :D