April 14, 2011

Student Loan Insurance

What happens when a student drops out of college without finishing his/her degree?

Well, nothing. However, there is a high percentage that said student will have to pay back thousands of dollars in student loans. This prospect is daunting even for those with decent jobs, let alone a college dropout. Student debts- a long term financial burden with no utility that is almost impossible to shed.

http://www.insidehighered.com/blogs/confessions_of_a_community_college_dean/dropouts_with_loans

The link above is from Inside Higher Education. The columnist proposed a possible solution to the growing number of people who drop out after taking student loans. He proposed for a change in public systems: that they charge less for the earlier semesters and more for the later ones.

Statistically, one-third of all college students drop out eventually. Some find it unenjoyable, others find it simply not worth the effort and also, commitment issues.

The possible solution: The creation of an insurance market that rewards students every year that they return to school to finish their degrees. A student loan insurance market would increase the number of undergrads finishing their degree by 3.8%, with greater effects for students who are currently more likely to drop out.

Now, there is a catch to this. It has the same problems that affect every insurance market, that is, people don't buy insurance unless they think they need it.


(Source: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1532391
Satyajit Chatterjee at the Federal Reserve Bank of Philadelphia and Felicia Anamaria Ionescu at Colgate University)

The authors acknowledge as much, writing:
Optimal insurance never encourages anyone who was putting in effort in college to stop putting in effort. Indeed, it encourages people who were not putting in effort to put in effort. The friction is simply that some students who were choosing to drop out may choose to continue on in college without putting in effort (there is no change in their college effort decision). Thus, insurance attracts students whose failure probability is 1.
 i.e. Insurance encourages people who were not putting in effort to put in effort, however some students who originally chose to drop out may continue their 'studies' without putting in any effort.

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Insurance is a form of risk management to defend against the risk of a loss. Agreeing to the terms of an insurance policy creates a contract between the insurer and the insured. Insurance is designed to protect the financial well-being of an individual or a corporation in a case of unexpected events.

23 comments:

  1. I never knew there was such a thing as insurance from student loans... I may need to look into this before I declare bankruptcy! (not really). It really is a shame in such a prosperous country we can't pay for people to be smart.

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  2. These days, taking on student loans amount to something like another mortgage.

    Seriously: 40K per year amounts to 120K by the end of your 4-year degree. When my parents went to college, it was something reasonable, like $4,000 annually.

    These days, it might be worth attending a low-cost college to fulfill your basic requirements and then attending "normal" college to get your degree.

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  3. Here in germany you must do a insurance for any loan .

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  4. I like that idea, that way you could still afford to test out college and not have it destroy you if you dropped out.

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  5. I don't think this sounds like a good idea... :/

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  6. Thanks for the information man!
    Btw very nice blog you have, I like the top image! Will follow ^^

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  7. well here in Australia, I do not have to pay anything back until I get a job which pays over a certain threshold. If i dont, then idk what happens.

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  8. This is the same here in the Netherlands, don't finish it? you pay...

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  9. I like the idea of later semesters costing more

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  10. What Niek said, just make sure you finish what you started if you don't then you have to pay up

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  11. Wasn't aware of that, learn something new everyday

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  12. Studying should be more affordable.

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  13. very informative, thanks

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  14. I dont think ill have to take out a student loan thanks to good grades

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  15. the education system is a shambles :\

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  16. Well, it's not the bank's fault that you don't study any more right?

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  17. i being uni soon, i hope i get a scholarship

    followed

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  18. I think insurance is a great idea for studies. Good info thanks

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  19. Studies is becoming a ball breaker. Sometimes i wonder why i bother

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  20. I am so worried about how much money I'm going to need

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  21. Best thing to do is work to pay for school while you are going to school. Then take those loans and put them into CD's. When you finish school pull money out of CD's and pay your loans and keep the interest.

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Yes, Cerebrate?