Researchers Posit Charter School Sector Headed for Bubble


A new study published by four academic education researchers suggests that charter schools are headed toward a bubble on the same level as the subprime-mortgage crisis years ago.

Several factors are discussed in the study “Are charter schools the new subprime loans?” that could be pushing charter schools toward a bubble similar to that seen when banks were offering risky mortgage loans.

Much like banks, school authorizers hold the power to determine whether or not a new school charter be issued.  While a number of authorizers exist, including state education agencies and independent charter school boards, the most common authorizer is a local education agency.

“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, said. “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.”

The authors suggest that a change in business practices led to the bubble in the case of the subprime industry, and could possibly also be the cause of a bubble for charter schools, writes Abby Jackson for Business Insider.

A change in loan origination led to the mortgage crisis, which originally followed an originate-to-hold model, changing over to an originate-to-distribute model.  That model allowed banks to sell mortgages into a secondary market where they were bundled and sold by government-sponsored enterprises.

This change in business models, for both the mortgage crisis and charter schools, place the risk onto a third party who may not have the same incentives as the originator.

The study also discusses something the authors refer to as the “Principal-Agent Problem.”  Mortgage servicers resulted from the OTD model who took care of administrative tasks previously handled by originators, including collecting late payment fees and foreclosures.  These servicers were compensated to foreclosure loans rather than trying to find alternatives.

Charter schools are faced with similar issues because many boards are opting to hire private education management organizations to handle the day-to-day administrative tasks associated with the running of the schools.

While charter school boards are required to follow the laws mandated by public schools, the outside organizations they hire are not, instead following an incentive to increase revenue or cut expenses.  The study authors suggest that it is this misalignment in interests that may cause the organizations to discriminate against certain groups of students they see as costly, such as special needs students.

Although the authors do see a need for alternatives to public schools, they finish by making a push to lawmakers to implement safeguards that would ensure a bubble does not develop and cause negative outcomes for the communities they are supposed to be helping.