One research effort of the exceptional, light-shedding kind was completed recently by Satyajit Chatterjee of the Federal Reserve Bank of Philadelphia and Anamaria Felicia Ionescu of Colgate University.
Their research began with a question: Would insurance against academic failure improve the dropout rate in higher education? This is decidedly not a simple question, for it raises all kinds of issues and unknowns related to economics, education, government and how we want to organize and run our lives.
There is an economic reason for the question to be raised by the researchers. Well over a third of all college students never obtain their degrees. But when they drop out of school they don’t go away empty handed. They get to keep their student loans.
From a cost-benefit standpoint then, student loans only make sense if you obtain a degree. Most of the economic benefits of education are stepped — that is, there are sharp breaks at elementary school, high school, college, graduate degree, etc. Three years of college doesn’t get you three quarters of the income boost that a college degree does. In fact, it doesn’t get you anywhere near that.
In addition to being an all-in risk, there is one more effect: college dropouts have a higher debt burden than college graduates — and this applies to two-year as well as four-year college programs. Debt burden for individuals is calculated as a percent of income, and dropouts have the big-time debt but lower incomes.
There is certainly a financial risk in taking out student loans, and that risk increases with the probability of academic failure. Chatterjee and Ionescu take a look at what might happen if risk-sharing — insurance, essentially — is introduced into the mix. As they describe it, “... 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.”
At this point we should remind ourselves that the authors are not advocating “failure insurance” as such, but simply investigating the feasibility of offering such a program and what would happen if it were available. They write, “The aim of this paper is to study whether the student loan program can offer insurance against college failure risk.” In particular, they are looking at the educational and economic effects in terms of enrollment and dropout rates.
Still, the waters get muddy early on in the paper and the authors do not help much with sentences like, “We will permit failures to pay less than graduates, but each participant will pay the full cost of college in expectation.” What this boils down to is that students who are well-prepared to do college work have a lower probability of failing, and would then pay a lower premium for their “failure insurance.”
Much of their research is taken up with examining the probabilities involved in academic failure — the role of “effort,” and of preparedness, etc. — and the economics of the decision-making process. The resultant math does not make this research paper an easy read, but it is worth it.
Their conclusions are that a failure insurance program could be offered through the existing student loan structure, and that it would produce a modest reduction in the dropout rate. Even though there are some questionable assumptions in the model they used — SAT scores, for example, are not a reliable predictor of dropout probabilities — it is thought-provoking, useful economic research.
At heart, though, it is up to us to remember that the fact that we can do something does not mean that we should do it. This research paper on insuring against academic failure should be viewed as a guide to thought, not a do-list item for the next Congressional session.
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.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.
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