As congress once again begins to grapple with how to impose necessary reform upon for-profit colleges, two economists have proposed the creation of a whole new insurance market—one that protects college drop-outs from enormous student loan debt. The authors explained their concept at an American Economic Association meeting over a year ago, but the idea seems to be picking up steam in recent weeks in the context of for-profit legislative reform, according to sources within the Department of Education.
Satayajit Cjatterjee of Philadelphia's Federal Reserve Bank and Felicia Ionescu of Colgate University suggest that insuring college students against the full cost of their education may increase enrollment. Students with failure insurance might only have to pay half of their student loan debt upon dropping out, so if students are less worried about the financial ramifications of doing poorly in college, they might be more apt to stay enrolled, work harder in their classes, and ultimately obtain a degree, Cjatterjee and Ionescu argue. According to the authors' calculations, failure insurance could increase college enrollment by 3.5 percent and college graduation by 3.8 percent. Even such a small, incremental increase in student enrollment could have a huge, positive impact on US global competitiveness.
However, it would also mean that students who pay for insurance and don't drop out have unnecessarily spent hundreds on monthly insurance payments. Failure insurance's idiosyncrasies aside, Cjatterjee and Ionescu think its an important concept considering that 47 percent of ex-students who took out loans don't have college degrees, according to the Federal Reserve’s Survey of Consumer Finance report. Apparently some in congress agree. Without a degree, college dropouts also make less money and retain more educational debt than graduates. So even if they wanted to complete their degree later on, finances might make it difficult.
“The financial risk of taking out a student loan but being unable to complete college may discourage some people from taking out a loan and enrolling in college,” the economists write. “Thus, even though prospective students may not be credit constrained, a mechanism to share the risk of failing to complete college—college failure risk—might improve the welfare of enrolled students and encourage more people to enroll and complete college.”
Cjatterjee and Ionescu have certainly proposed an interesting concept, but failure insurance shouldn’t be something that is required of individual students. Rather, I contend that institutions with high drop-our rates (low matriculation) and poor student loan repayment performance should be required to self-insure and to indemnify both students and lenders. AND, there should be a prohibition against passing the costs of insurance on to students. One can easily imagine a relatively straight forward and transparent system, regulated by the Department of Education.
No doubt, congressional sentiment makes large-scale adoption of such a measure a long-shot; as anti-regulation Republicans will label the concept a bad solution to a symptom of a larger problem: the soaring costs of higher education for all students.
Indeed, that may be the right argument and the right issue. But if college student loan defaults continue to soar, at least and especially among for-profit college students, self-funded “drop-out” insurance may be their only way to convince a skeptical congress that students at for-profits deserve the same consideration and treatment in the area of federal student loans.
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