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Failure Insurance for Students? Why Economists Think it May Work

Monday, January 11th, 2010

What if students applying to college knew that they could enroll in the school of their choice, and receive a tuition reimbursement if they later discovered it wasn’t a good fit? That might be possible some day if the insurance industry adopts a type of policy that two economists have outlined in a working paper. In Insuring College Failure Risk, Satyajit Chatterjee, an economist at the Federal Reserve Bank of Philadelphia, and A. Felicia Ionescu, an assistant professor of economics at Colgate University, explain why such a policy makes sense.

At the annual meeting of the American Economic Association, the economists presented mathematical models, which show that “failure insurance” might be a useful component of the federal student loan program. The models theorize that students’ college decisions are driven by their finances, their views on future earnings, and the amount of “disutility” that they expect from the academic work. If structured correctly, the failure insurance would ease student anxieties over debt, while giving them an incentive to stay in school. The economists explained how it would work in a Q & A with the Chronicle of Higher Education.