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This kind of competition happens in other areas of academic pursuits too. Is that strictly a bad thing?

The bad thing about UT's policy is that it encourages well-off students to move to a less-competitive school district (usually rural) in order to improve their chances.

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This seems like a good thing to me actually, lower performing students generally benefit from having high performers in their social circles

If we were really optimising for this, we’d ban colleges using anything other than geographic area. Keeping all the high performers at high performing unis will hurt the lower performers

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