Summer School #2

Welcome to Scholastic Alchemy! This is mostly a blog where I mostly write about education. Usually, I post some links and commentary about them on Mondays and then later in the week I write something longer about a topic of my choosing. But, it’s summer and we all know that the rhythm and dance of educators’ lives shift in the summer months. Our time becomes more fungible but somehow still can’t fit everything in. Maybe it’s taking on more childcare duties as our own kids are out of school. Maybe it’s finally time to read all those articles and books that have been piling up or to pound out chapters of a long-neglected manuscript. Or, maybe, you’re teaching summer school. Summer school posts are going to be irregularly timed, more personal and reflective, and a bit more casual, befitting the vibes of summer.

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I like to know things

I started writing about real-world topics in a public space on Facebook, of all places, back in 2007. It was, for the most part, a conversation among friends and a place to share links and comment on the state of the world. Prior to that I had been a voracious consumer of blogs, especially blogs about business, economics, and politics. A lot of that early web 1.0-1.5 blogging remains influential in my worldview, especially as a writer. One thing I learned is that reading widely about topics outside my domain of expertise is important for developing a rigorous understanding of current events. I knew a lot more about the real estate bubble and the ensuing 2008 financial crisis than people I knew who were directly involved in real estate and finance.

I remember explaining to a friend, a relator, that the mortgages his clients were getting weren’t all just sitting with the banks that originated the loans but were, instead, being sold to financial institutions and packaged with other mortgages to create securities that could be traded on markets. They were mathematically less risky but relied on an underlying assumption that only a small portion of the mortgages in these securities would default. Because they satisfied mathematical theories about low risk (and due to some moral hazard on the part of ratings agencies) these mortgage-backed securities were considered low risk and given high credit ratings. A high credit rating is shorthand for “safe” and investors bought them in droves. My friend didn’t understand what that had to do with him. He was happy because the banks were willing to loan pretty much anyone money to buy a home and he earned a portion of all the homes he could sell. Of course, by then it was already over. The frenzy had died down, sales of new and existing homes were already down quite a bit by the time we had our chat in the summer of 2007.

It turned out that the underlying premise of these securities was simply wrong. These bundles of mortgages began to contain more and more mortgages that were in default and, as home prices fell, the underlying asset that was supposed to backstop the losses just wasn’t there. All of this would have been bad enough but there was one more layer to the financialization of home mortgages: credit default swaps. You see, none of what I explained above was secret. I was learning all of it from blogs and a little bit from business and finance journalism. All the flaws were out there in the open for people to see, if only they cared to look. Some people noticed and made a lot of money as things fell apart. Banks and big financial institutions aren’t dumb and they also saw the problems with mortgage-backed securities and used another financial instrument to assure their investors and the counterparties in their business dealings that everything would be fine. They used the credit default swap.

Now, the discussion of the credit default swap could be long and complicated but the simple version is, I think, actually better for explaining what went wrong. If I loan you money and then you go bankrupt and can’t pay me back, that’s a big problem. A credit default swap is, more or less, a kind of insurance that I could buy that said if you go bankrupt, I get paid back anyway from some unrelated third-party insurance company. However, this kind of arrangement was also available to anyone else who wasn’t involved in the loans. Billybob could take out the same kind of insurance and get paid if you went bankrupt and couldn’t make good on your loan to me. Remember those mortgage-backed securities from two paragraphs above? Banks and hedge funds and all kinds of financial institutions, understanding that these securities were becoming riskier, began to take out credit default swaps against financial transactions involving those securities. Then, as the risk spread more, they started to take out even more credit default swaps against all kinds of financial arrangements. Everyone understood that someone somewhere was going to have trouble making good on their financial agreements and everyone wanted to be paid when that happened. Pretty soon, there was more money on the line in the default swaps than in all the mortgage-backed securities on which those contracts depended. So, even a small default could trigger losses many times larger than the value of the underlying transaction and those losses could be incurred by uninvolved third parties simply speculating and the companies issuing the credit default swaps were on the line for so much “insurance” that they were going bankrupt, too. And that’s how we ended up with the Great Recession and financial problems still playing out two decades later.

Credit where credit is due

We think about credit a lot in the world of education, too. Credits are what students earn by showing up and taking classes. In order to graduate, kids have to earn a specific number of credits in various subjects.

What many people don’t know is that the idea of earning credits for completing courses originated in the financial world. The Carnegie Foundation, set up by that Carnegie, created what they called the “Carnegie Unit” which itself originated in a financial institution created to fund the retirements of college teachers. That institution is still with us today, by the way: TIAA-CREF. The idea was that college teachers would earn one unit, a credit, toward their retirement for each hour they taught. Credit implied some kind of completed labor that yielded some kind of eventual payment, in this case in retirement. In that sense, it is the same as other kinds of financial credit that are, at their root, a statement of trust in the borrower and risk by the lender.

Only a few years later, however, colleges themselves began to adopt credits as a measure of the time students spent in school and shifted it from a financial meaning to today’s meaning. The Carnegie Unit, also called a credit, became not just a measure of the amount of teaching done, it also became a standard for measuring the amount of time a student studied with a teacher. If you want to know why a bachelor’s degree requires 120 credits, this is why. This eventually filtered down into high school as well. You can see in the Georgia High School Graduation Requirements that there’s still a conflation of credits and (Carnegie) units.

We can still think of these credits in terms of trust and risk, too. The lender, in this case, is the state. It’s “lending” money to educate children who are, in some ways, the “borrowers” who repay us by completing their education and contributing to society. Each credit earned is supposed to represent instruction on the part of a teacher and learning on the part of a student. Importantly, it’s not just supposed to be seat time, and there are grades and some sense that the kids who earn the credits have really learned something. Otherwise, they do not earn the credit. I think, though, that relationship has broken down. Allow me to torture an analogy here just a bit.

Credit Recovery : School :: Credit Default Swap : Finance

If you caught my post last week, you learned that I taught summer school as my very first gig as a fully credentialed educator. One of the illusions I was under was that summer school was for kids trying to skip ahead for some reason or another. In fact, if you ask someone in their 40s or 50s today (not a teacher, mind you) what the deal with summer school was, there’s a good chance that they’d think what I thought.

Yes, there has always been summer school for kids who were behind, but it was not exclusively or even primarily for those kids. All of this changed, however, in the early 2000s and by the 2010s with schools being held accountable for their graduation rates, schools were under a lot of pressure to get kids their missing course credits. What emerged was a hodgepodge of systems we lump under the term “credit recovery.”

This has all been on my mind for a few weeks because Jenna Vandenberg pointed me to Molly B’s post about failing students by not failing them. Molly’s point was that schools are simply responding to their regulatory environment, one that demands they raise graduation rates and promotion rates. Jenna’s post, though, reminded me of what teaching summer school looked like when credit recovery became the main purpose of summer school.

While my district didn’t use Plato, as far as I can remember, I do recall just how simple the credit recovery software was to game. Kids had infinite tries to get multiple choice questions right, so it was only a matter of time before they simply guessed randomly until they got the right answers. After a couple of years teaching summer school the traditional way, with a group of kids all taking the same class, my districted shifted to the credit recovery model. “Teaching” summer school now meant watching two dozen kids in the computer lab. They weren’t all taking the same course. Some were taking classes I wasn’t certified to teach. It didn’t matter, though, because they didn’t need help with the material. They only needed to click until they passed.

Credit recovery is the educational version of a credit default swap. It exists because some small portion of kids fail their classes but could have passed them under different circumstances. It exists as insurance against a school or a district facing takeover because of low graduation rates. The money is lent through instruction and then “insured” or “hedged” with a smaller bet on some kind of credit recovery platform like Plato. On the margins this feels like a good deal because even just a few more kids passing is enough to satisfy accountability requirements. But two important parallels exist to the financial crisis and make this analogy work. First, just as default on mortgages appeared rare until all of a sudden, it wasn’t, kids outright failing was rare until it wasn’t. In states as different as Washington and Arkansas, about 1 in 5 freshmen fail a course. In fact, nationwide the number is also about 20%. (I’m citing myself here, my dissertation research was all about the transition into high school and I had to spend a lot of time learning about and discussing course failure in 9th grade, you will just have to trust me that this is ballpark accurate.) It’s even worse than that, though, because failures are correlated and a freshman who fails one class is very likely to fail one or two other classes.

When we’re deploying credit recovery for a fifth of our students, sometimes putting kids in credit recovery year in and year out, we’re doing that second thing that parallels the financial crisis: the problem is beginning to grow larger than the losses they’re meant to insure against. Some students are earning more than half of their high school credits through shoddy credit recovery programs, and it makes schools look better because the kids graduate on time. In the process, we’re destroying the entire thing that we were hedging against because the kids learn nothing, have no skills, and simply pass on into the world of work or college. Credit has to mean something. It has to certify that kids learned something. The more we debase it, the worse things will get.

Credit default swaps did not attenuate the risk inherent in speculative financial assets. They became speculative financial assets themselves and in doing so warped the entire financial system until it collapsed, taking a decade of economic growth and prosperity with it. Credit recovery is not attenuating the kids slipping through the cracks. It’s papering over the problems facing our schools until it’s someone else’s problem but that’s not a sustainable solution, nor is it one that will keep schools and the society that depends on them functional.

Of course, the flip side of this is that we, as a society, are going to have to make a plan for “the kids who can’t.” If we don’t pass them, what do we do with them? A problem for another summer school post, perhaps.