Using Financial Derivatives to Deflate the Higher Ed Bubble

Michael C. Macchiarola & Arun Abraham:

After the bursting of the housing bubble and the Great Recession that followed, there has been an increasing focus on improving market transparency and recognizing other potential bubbles. The higher education and student loan markets are under new levels of scrutiny because they display many of the hallmarks of a bubble. The American government's model of freely extending federal loans to students, while improving lower- and middle-class access to higher education, has enabled the formation of detrimental distortions in the higher education market. At the same time, the soaring cost of higher education has saddled a generation of young Americans with unmanageable student loan debt. Evidence is beginning to mount that, for too many, their debt-financed higher education represents a stifling encumbrance instead of the great investment that society's collective commonsense has long suggested.

This Article explores the factors that contribute to the distortions in the higher education market, including (1) the informational asymmetries that exist between the various parties to a typical debt-financed purchase of an education, (2) accreditation rules, (3) the peculiar incentives of school faculties, and (4) widely followed school rankings. Due to nuances between different segments of the higher education market, this Article focuses on one segment for the sake of brevity: law schools. However, the analysis and prescription have more general applicability to all segments of the higher education market.

Posted by Jim Zellmer at October 17, 2010 4:32 AM
Subscribe to this site via RSS/Atom: Newsletter signup | Send us your ideas