Home > Uncategorized > Charter School Bubble? No Problem… We’ll Bail Out the Profiteers and the Children Will be Collateral Damage— Again

Charter School Bubble? No Problem… We’ll Bail Out the Profiteers and the Children Will be Collateral Damage— Again

January 8, 2017

The Business Insider web page posted an article describing the similarities between the charter school industry and the mortgage industry pre-2008. Titled “An Alarming New Study Shows Charter Schools Are America’s New Subprime Mortgages”, Abby Jackson’s piece describes how the mechanism for funding and overseeing charter schools has an eerie resemblance to the mortgage industry in 2008.

“Supporters of charter schools are using their popularity in black, urban communities to push for states to remove their charter cap restrictions and to allow multiple authorizers,” one of the study’s authors, Preston C. Green III, told The Washington Post, where we first read about the study. “At the same time, private investors are lobbying states to change their rules to encourage charter school growth. The result is what we describe as a policy ‘bubble,’ where the combination of multiple authorizers and a lack of oversight can end up creating an abundance of poor-performing schools in particular communities.”

With the mortgage crisis, loan origination changed from an originate-to-hold model to an originate-to-distribute model. The OTD model allowed banks to sell mortgages into the secondary market, where they were bundled up and sold by the government-sponsored enterprises Fannie Mae and Freddie Mac.

In both the mortgage crisis and the charter industry, these business-model changes essentially transfer the risk to a third party whose incentives don’t necessarily align with those of the originator.

The study also highlights a similarity its authors call the “Principal-Agent Problem.” In the mortgage crisis, mortgage servicers emerged as a result of the OTD model. Servicers handled administrative tasks that originators used to carry out, such as collecting fees from late payments or foreclosures.

Again, the incentives of the servicers and the originators diverged, as the servicers were compensated to foreclose loans rather than to find alternatives.

Charter schools have this same misalignment when it comes to management by third-party organizations, the study says. Many charter-school boards hire private education-management organizations to run the day-to-day administrative tasks of the school.

The study says that while charter-school boards have the responsibility to follow the laws mandated of public schools, the incentive of these outside organizations is to increase revenue or cut expenses. And that misalignment creates an environment that may discriminate against students the organizations see as “too expensive,” such as those with disabilities, according to the study.

It’s possible the concerns about a bubble are overstated… and even if the bubble does bring down the charter school industry the investors will be protected and the children left in the lurch will be “collateral damage”. But the misalignment problem is particularly concerning since it is a structural one that will have an impact even if a bubble never materializes… and it is the biggest problem with the entire movement toward charter schools and “choice”. As long as charters and choice require a large time commitment and complicated paperwork on the part of parents many children will be left behind through no fault other own. Charters and choice are a fast and relatively inexpensive solution to a complicated problem… a solution that has the advantage of turing a profit for those who have funds to begin with while offering an intuitively appealing argument that they are offering an equitable opportunity for all children.

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