A while back, I suggested that there might be a bubble in the higher education market, and that students taking on large amounts of debt to go to non-elite schools could be analogous to sub-prime mortgage customers. Well, somebody else has picked up on the theme, and that somebody is none other than Steven Eisman, a hedge fund manager featured in The Big Short as one of the few people who made tons of money by betting against the housing market before it crashed. In particular, he is pointing to the for-profit education providers as the sub-prime lenders and claims that the bubble could pop if Congress tightens lending rules:
“Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry” said Eisman, 47, one of the sellers featured in “The Big Short: Inside the Doomsday Machine” (Norton, 2010), Michael Lewis’s book about investors who anticipated the housing bust. “I was wrong. The for-profit education industry has proven equal to the task.”...
“Default rates are already starting to skyrocket,” Eisman said at the Ira Sohn Investment Research Conference, in New York. “It’s just like subprime, which grew at any cost and kept weakening its underwriting standards to grow.”
Just as bond-rating firms gave high grades to securities backed by risky mortgages, so the accrediting associations responsible for monitoring educational quality of for-profit colleges don’t provide thorough and independent scrutiny, said Eisman. Because accreditation is a peer-review system, in many instances representatives of for-profit colleges sit on the board of the body that certifies them, he said.
The whole article is worth reading.