The Tuition Insurance Industry is Red Hot as the Cost of College Skyrockets

Not only is tuition insurance now a thing, but the industry is absolutely booming. The Wall Street Journal reports that 70,000 policies were written across the United States over the course of the last year, which was up from just 20,000 policies that were written five years ago. And get this – tuition insurance only ensures that a student's tuition is reimbursed (sometimes, partially) if they drop out during a period after their university's allowed withdrawal deadline and before the end of the semester.

But the reported rise in students attending universities with disabilities as a result of mental health disorders – combined with the rapidly rising cost of tuition - has caused the birth of an industry that doesn't look like it has any plans of slowing down.

Just as it is in any industry that is attracting large quantities of cash, money making derivatives and alternative products tend to pop up. This was notably the case in the world of cryptocurrency, when we reported back in July that the crypto-insurance industry not only existed, but similarly, was also blooming.

The Wall Street Journal was recently out with an article that led off by detailing the case of a woman who paid $238 for tuition insurance and was able to receive a full reimbursement of $16,000 in tuition that she spent when her daughter, a junior at Marymount Manhattan College in New York, had to withdraw from school due to an allergic reaction to an anxiety medication.

Tuition insurance is pitched as being able to protect against these specific types of scenarios. With the cost of tuition so drastically high, it is becoming a more and more appealing option to those funding their children to attend university. When asked about what was driving the boom in the tuition insurance industry, an insurance executive simply commented, "the cost of college is driving this", and then followed up by saying "families cannot afford the loss of $30,000".

As noted in the Wall Street Journal article, tuition and fees has increased, on average, to $34,740 last year – up from $15,160 in 1988. These numbers are adjusted for inflation.

The article notes that a lot of schools already carry a reimbursement policy, but that usually doesn’t apply to the second half of any given semester. For example, the policy at Vanderbilt University, where students are paid back up until about halfway through the semester, at which point they no longer entitled to reimbursement. Vanderbilt charges about $59,000 for tuition and housing, according to the article, and tuition insurance there is about $530. In general, the article notes that tuition insurance generally costs about 1% of tuition:

Several companies provide tuition insurance, Most policies charge in the neighborhood of 1% of the cost of school. A semester that runs $30,000 would cost about $300. At least 200 schools now work with insurers, offering the coverage to families when the pay the tuition bill.

Liberty Mutual Insurance started offering tuition-reimbursement policies this year, in part because of consumer demand. When a student drops out mid-semester parents are often “very surprised to learn that you may not get anything back,” said Michelle Chevalier, a senior director at Liberty Mutual.

In addition to the rising cost of college, a growing number of mental health issues with students are also driving the demand for this insurance. Insurance plans don't usually cover academic or disciplinary related drop-outs. The article notes:

Plans don’t typically cover students who drop out for academic or disciplinary reasons but will for medical reasons.  Generally, insurers don’t ask about pre-existing conditions, either mental or physical. The idea, GradGuard’s Mr. Fees said, is: “If a student is healthy enough to start to a semester, they qualify.”

Insurers say that the number of claims they receive citing mental health incidents has risen. As many as one in four students at some elite U.S. colleges are now classified as disabled, largely because of mental-health issues such as depression or anxiety, according to the National Center for Education Statistics and interviews with schools.

Carmen Duarte, a spokesperson for A.W.G. Dewar, Inc. which has been offering tuition-reimbursement policies since the 1930, said claims have remained flat for physical-health incidents but increased for mental-health reasons.

The interesting thing, however, is while everybody is talking about tuition insurance and the purposes that it serves, nobody stops to ask why college tuitions on an inflation adjusted basis have skyrocketed so much.

It seems that only a couple, non-mainstream analysts want to actively address the fact that providing student loans for nearly everybody, running up a nationwide $1.5 trillion tab, could possibly be creating an artificial demand that is allowing colleges to take advantage of guaranteed money and hike up the price of tuition. It’s once again an example of the government getting involved and disabling the key benefits of free market capitalism.

A genuine demand slow down for university enrollment could be beneficial, as it would encourage colleges to compete, lower prices and ensure a higher quality of education that they could pitch to entice new enrollees. But this artificial bubble created by the influx of student loans and the idea that "everybody has the right to go to college" has done just the opposite: created such sky-high tuition prices that derivative industries like tuition insurance have been born, and will likely continue to flourish.