Drop-Out Insurance

People complain about car insurance, worry about health insurance and debate the need for life insurance, but there isn't much talk about tuition insurance.

It might be because it’s perceived as a sunk cost; because colleges often refund some percentage of tuition until the midpoint of the semester; or because it’s so rare for people in their late teens or early 20s to contract debilitating illnesses. Or maybe because policies usually don't refund tuition for students who drop out to "find" themselves or who get kicked out for drinking or bad grades. But the idea of paying a bit extra to ensure that a student and his family get the bulk of what they’ve paid for a semester has never quite caught on.

The market leader -- and virtually only player -- is Massachusetts-based A.W.G. Dewar, which offers insurance policies to students and their families at 180 U.S. colleges and universities, as well as at close to a thousand private primary and secondary schools.

For a few hundred dollars a year, Dewar promises to refund most or all of a semester’s costs that aren’t refunded by the institution if the student withdraws for well-documented medical reasons. “Families,” says Dana Tufts, the company’s president, “are interested in peace of mind, in having this option available especially as tuitions have increased substantially over the years.”

But because Dewar has chosen to offer policies at a limited number of “institutions where this is likely to work” (which, looking at the roster of colleges the company works with, generally means elite, expensive and mainly residential) as Tufts puts it, other companies are now trying to move in to reach a larger market of tuition payers. The latest is Markel Insurance, which is working with several regional and national brokers in an attempt to cater to what it sees as an unserved population: people paying tuitions to colleges and universities that don’t work with Dewar (or even those that do).

Markel underwrites policies that are marketed by, among others, Niagara National Inc., Educational Insurance Plans and Next Generation Insurance Group. David Galvin, president of Educational Insurance Plans, says he began offering the policies “because there wasn’t anything else out there for parents or students at colleges that aren’t part of Dewar’s program.”

He adds: “Some parents see risk. You know, a college education is expensive and they want to feel protected in case the student has to withdraw.”

But Tufts says he isn’t too concerned by Markel’s foray into tuition insurance. “Every few years, someone will file with states under a ‘me too’ policy,” but “competitors come and go.” Dewar is unique, he argues, “in working exclusively with educational institutions and families, and truly having their interests at heart.”

Dewar only sells policies through colleges – and not directly to parents – because “we like the control aspect of having the institution involved,” Tufts says. Colleges maintain official enrollment records and have their own repayment policies that make it easier for the company to verify claims and pay them, but institutions don't get a cut of the premiums paid to Dewar.

The Dewar policy offered at Occidental College in Los Angeles offers 75 percent repayment beginning at day 11 of the term (when, without insurance the college would refund only 70 percent). Increasingly more of that 75 percent is covered by the policy as the semester progresses. The college offers less and less of a refund over time, and none at all following the 25th day of classes – when the insurance policy still pays 75 percent.

Markel’s policies offer 100 percent coverage for medical withdrawals or withdrawals as a result of the death of a tuition payer and 75 percent refunds for withdrawals “due to emotional, nervous or mental disorders.” The company's policies also include optional coverage for 75 percent refunds for academic dismissals and 60 percent for voluntary withdrawals.

Almost all coverage from Markel and Dewar is less robust for mental health withdrawals than it is for physical health withdrawals. But, in Vermont, where state law mandates equal coverage for physical and mental health, a state agency has just ruled that tuition insurance must equally cover both reasons for withdrawal. The decision comes after a complaint from a former student at the University of Vermont, which offers tuition insurance through Dewar. Beginning this fall, the university’s policies will offer an 80 percent refund for either kind of withdrawal.

Most Dewar policies cover preexisting conditions, and Markel's policies generally waive preexisting conditions after six months of membership.

Brokers offering Markel’s plans sell primarily to individuals, but have also followed Dewar’s lead in offering policies through institutions. This fall, Niagara offered a Markel policy to Elmira College students and their families for $503 annually. Tuition, room and board there totaled about $45,000.

Markel is also selling its policies through affinity groups like College Parents of America, which is in the process of rebranding itself to be more like AARP or AAA, where “insurance is a compelling reason to join,” says James Boyle, College Parents’ president.

Boyle says he recognized the leap of faith that parents take in laying out a semester’s worth of tuition and thought insurance made sense. He’s partnered with Next Generation, which offers tuition insurance and other college-related policies under the GradGuard brand name, to offer tuition insurance as a benefit of membership. “At thousands of schools, there is no tuition insurance. Parents want this product but because their kids’ colleges don’t offer it, they can’t get it,” he says. “So we’re going to offer it directly to the parents who want it.”

College Parents’ $89 base membership fee includes $5,000 of annual coverage. For $299 annually, College Parents offers $15,000 in annual coverage, plus a fringe benefits like small gadget theft insurance and personal computer protection. For $599, parents can get $50,000 in annual coverage.

By offering the insurance, Boyle is hoping to attract new members to the group as part of a larger effort to “rethink our mission” as an organization that can “help parents understand, prepare for and protect their investment” in paying for part or all of a child’s college education. Tuition insurance is embedded in membership but the group will also offer members-only student health insurance and renters' insurance.

But some financial aid experts question the need for tuition insurance, and even those who sell it acknowledge that not every tuition payer is going to feel the need to buy a policy.

Mark Kantrowitz, publisher of Finaid.org, says he considers tuition insurance “more of a niche product, mainly selling reassurance to a pretty rarefied group of parents.” Low costs at community colleges and some other public institutions, plus federal and institutional financial aid, mean that many families make small contributions already and are willing to take the risk. “If your child is attending a community college you’re extremely unlikely to be interested in this. If your child’s attending a $50,000 a year school, you’re more likely to be interested.”

Students from low-income backgrounds could benefit from the policies, but because they are so poor they’re unlikely to take the policies out to begin with, says Justin Draeger, vice president of public policy, advocacy and research at the National Association of Student Financial Aid Administrators. “Because tuition insurance isn’t an educational expense, it’s not included as a cost of attendance and can’t be covered by student aid. They’re not likely to have the cash on hand, and if something does go wrong and they need to drop out, they’re just going to lose whatever they’ve put in out of pocket.”

Both Kantrowitz and Draeger note that because colleges publish refund policies and have appeals policies, it makes sense for families to figure out whether they’re actually taking a big risk by not buying the insurance. “A little bit of homework up front about the college’s rules can make it clear that the insurance isn’t necessary,” Draeger says, adding that in most instances he thinks it isn’t.

Most parents seem to come to the same conclusion, too. Tufts, of Dewar, says that on average 10 percent of parents at member institutions choose to buy policies.