Failure Insurance?

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What would happen if people could go to college knowing that they wouldn’t be financially responsible if they failed to complete school? Would that cause more people to go to college and succeed there?

This idea, colloquially called “failure insurance,” comes from a paper presented at the annual meeting of the American Economic Association, that font of attention-grabbing ideas for higher education. According to an article in the Chronicle of Higher Education, one of the study’s authors explains:

A student will be eligible for loan forgiveness if he or she has “failing” grades. Currently, a student must maintain a certain GPA in order to be eligible for a student loan. The same standards can be applied to determine whether a student has “failed” and is therefore eligible to collect insurance. In the event of failure, the student is forgiven a portion of his or her outstanding student loan. This residual risk is like a deductible in a standard insurance contract and will lower the incentive to shirk.

The premise is this: people are reluctant to go to college because of the financial risk associated with it. The decision to drop out of college is apparently also financial: the student is more likely to drop out the greater the financial risk he has assumed.

This solution is very odd. If the problem is that there’s too much financial risk associated with going to college, wouldn’t it make far more sense to reduce that risk by making college cheaper, rather than come up with some complicated government-backed plan to reimburse students their money when they fail out of college?

An effective rebuttal of this particular policy idea comes from James McCusker, who writes writes in the Everett, Washington Daily Herald that that the insurance plan is addressing the wrong issue:

We need to do something about higher education, but the dropout rate is a symptom, not the source of the problem. The costs of higher education continue to rise uncontrollably and borrowing to meet that cost makes little sense for most people. Notably, dropouts are not included in the calculations when college marketers tout the economic benefits of higher education.

We need to address the distorted costs of higher education, not underwrite the existing cost structure by offering risk-sharing insurance. We also need to address the decaying standards of our secondary schools, not encourage unprepared students to enroll in college — only to saddle them with indenture-like loans when they drop out.

I couldn’t have said it better myself.

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Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer