We just got even more evidence supporting the theory that charter schools are America's new subprime mortgages

The big shortParamount PicturesSteve Carell and Ryan Gosling in a scene in ‘The Big Short,’ a movie about the housing bubble during the 2000s.

The Office of the Inspector General (OIG) released the results of a damning audit of the charter school industry which found that charter schools’ relationships with their management organisations pose a significant risk to the aim of the Department of Education.

The OIG is a federal agency which prevents inefficient or illegal activities.

The findings in the audit, specifically in regard to charter school relationships with CMOs, echo the findings of a 2015 study that warned of an impending
bubble similar to that of the subprime-mortgage crisis, one of the authors, Preston C. Green III, told Business Insider.

“I’m happy that the Office of the Inspector General is shining a light on the issue about the need for greater accountability,” Green said.

The study, titled “Are charter schools the new subprime loans?” points out several factors that appear to be edging the charter industry — consisting of schools funded partly by tax dollars but run independently — toward a bubble premeditated by the same factors that encouraged banks to start offering risky mortgage loans.

One such similarity is what the study calls the “Principal-Agent Problem.” In the mortgage crisis, mortgage-servicers emerged and began handling administrative tasks that originators used to carry out, such as collecting fees from late payments or foreclosures.

Since the servicers were compensated to foreclose on loans, rather than to find alternatives, the incentives of the servicers and the originators diverged, which negatively impacted both homeowners and banks that forecasted mortgage payments into the future.

Kipp charter schoolMichael Buckner/Getty ImagesStudents at KIPP Bridge Charter School in San Francisco, California.

Charter schools have this same misalignment when it comes to management by third-party organisations, according to the study. Many charter-school boards hire private education-management organisations — with similarly divergent interests as the loan servicers in the mortgage crisis — to run the day-to-day administrative tasks of the school.

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

The recent OIG audit found the same divergence of incentives within the charter school market and specifically noted that 22 or the 33 schools in its review had internal control weaknesses.

“The Department’s internal controls were insufficient to mitigate the significant financial, lack of accountability and performance risks that charter school relationships with CMOs [charter management organisations] pose to Department program objectives,” the OIG wrote in the audit.

With this in mind, the factors leading up to the mortgage crisis look eerily similar to the ones currently impacting the charter industry, and authors of the 2015 study predict that if the bubble burst, entire communities of students could be stranded without alternatives. Local districts could also face lawsuits, not to mention investors into the sector would lose money.

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