What higher education needs is student loan insurance

Carlo Salerno
Student Voices
Published in
4 min readNov 7, 2016

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Source: http://www.readygrad.com.au/blog/2014/06/no-graduate-job-offer-now-what/

Millions of families struggle to find ways to pay for college today. To help, the federal government offers those covering the cost with student loans the option to enroll in one of several income-based repayment (IBR) plans that cap monthly payments and eventually forgive any outstanding balances.

For some these plans are seen as the best and last hope for keeping college affordable. For others their $20 billion-per-year price tag is not only prohibitively expensive to taxpayers but also end up helping those who need it the least.

Higher education isn’t the only market where consumers typically buy things by going into debt. Millions of people finance new and used cars every year at levels similar to what typical undergraduates borrow, and most homebuyers end up with six-figure mortgages. Both are arguably as important to families as education, yet consumers still manage to successfully pay for these things without all of the repayment options and economic hardship plans that student loans have.

One reason lenders don’t need to offer such programs is that there’s a car or a house that can be reclaimed when non-payment occurs. The other is that insurance markets help lenders cover the risk of nonpayment, like private mortgage insurance, or to deal with cases where assets lose value before the loan’s paid off, like buying full-coverage insurance on financed cars.

Why not apply this model to student loans? Giving borrowers the ability to insure their loans in the same way that they insure other debt-financed goods doesn’t just solve the major problems that IBR critics have; it also provides the consumer protections that IBR proponents believe student borrowers need and want.

Capping payments and eventually forgiving balances the way IBR does may be cheaper for students, but research shows it disproportionately helps borrowers who choose to attend pricier schools or programs (especially graduate school) as well as those who earn degrees in fields that lead to limited employment opportunities or earnings prospects.

Student loan insurance would provide students with a financial safety net and preserve their flexibility to enroll in whatever school and whatever degree program they’d like. The only real difference is that they, and not taxpayers, would pay for the right to do so.

Replacing IBR with student loan insurance would also fix a major problem that plagues student loan servicing: delinquent borrowers not contacting or ignoring servicers’ calls when it’s clear that they need help. While loan servicers can offer options like IBR as more affordable repayment plans, they still require financially struggling borrowers to spend dollars when they obviously can’t. That folks with insurance would have someone else make those payments on their behalf actually creates incentives for borrowers to proactively reach out at the first signs of distress.

Credit insurance isn’t a new idea; the U.K. has long let consumers buyPayment Protection Insurance. Students could buy insurance when they sign their master promissory note for that year’s federal student loans. It may be as simple as a check-this-box option on the form itself, but more likely people would have the choice to shop the same way they can for health insurance. Borrowers could make a one-time premium payment that they could roll directly into the loan, again similar to private mortgage insurance.

Rates would likely be based on the school a student attends, the program they enroll in and possibly even their grades–all of the things policymakers believe play a role in future success. Once they leave or graduate, those unable to make payments and meet the policy’s payout conditions would have some fraction of their payments covered.

All kinds of variations are possible. Borrowers could be allowed to retroactively insure their loans as they approach graduation. Insurers could offer borrowers rebates if they end up transferring to schools whose graduates have better employment outcomes or if they change majors and graduate with a more marketable degree. Schools may even be willing to buy insurance on their students’ behalf.

In the end, insurance won’t fix higher education’s financing woes. It won’t protect against tuition increases and it could well be the case that premiums for some schools or programs could be high enough to discourage enrollment. To some, that could be seen as harming access. To others, that could be seen as the market protecting consumers from bad programs or bad actors.

Taxpayer dollars are scarce. There are alternative ways to keep college affordable, but doing so requires rethinking the role that the private sector can play in making that happen.

@EdAnalyst

Note: This piece first appeared in Forbes.

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PhD. Education economist. Co-author of: Student Financial Success: a surprising path to fix the college completion crisis.