Despite sweeping complaints about increasing college costs and student debt, college still offers a handsome payoff for most graduates. But what about the students for whom college doesn’t pay off? Too many policy proposals nominally aimed at helping those students—such as universal student debt forgiveness—promise to instead throw billions at people for whom college was a boon, using an ax where a paring knife is in order.
Degree Insurance seeks to partner with colleges and universities to guarantee a graduate’s earnings … [+]
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It seems like there should be better, more targeted solutions. Degree Insurance, a new start-up, offers one intriguing approach to tackling the problem without telling those who used their taxpayer-funded degrees to land high-paying jobs that repayment is now optional. I recently spoke with CEO Wade Eyerly about his company’s plan to make investing in a college degree less risky.
Eyerly is an economist and an entrepreneur who previously launched Surf Air, a members-only airline. He also comes at this as a pretty atypical college-goer. He recalls, “I didn’t really know how to get in to college. I didn’t understand that people applied a year in advance . . . I drove [up] and asked how to sign up for a dorm.” Eyerly eventually graduated from the University of Central Missouri.
Degree Insurance seeks to partner with colleges and universities to guarantee a graduate’s earnings for the first five years following graduation. As Eyerly puts it, “Most everything else is focused on controlling costs. We answer the question, ‘Did you get what you paid for?’”
Eyerly explains that for colleges that purchase insurance, “We use data on student outcomes from that college to set expected salaries for their students, by major.” When students graduate from a college with an income guarantee, Degree Insurance will cover those students for five years after graduation based on the major in which they graduate. At the end of the five years, students are required to send Degree Insurance their W2s or tax returns and they’ll receive a check, says Eyerly, for “the difference between what they were expected to make and what they actually made.”
For example, if communications majors from College X are expected to make $40,000 a year, and a graduate actually earned $30,000 a year during her first five years out, Degree Insurance would cut a check totaling $50,000 to cover the $10,000 difference between those two numbers for each of the five years.
Eyerly sees big benefits here for both colleges and students. For colleges, “There’s a significant competitive advantage in being among the first to really stand behind your product and guarantee that it works.” Plus, the outlay by the college is a one-time cost—typically projected to be between $1,000 to $4,000 per student—paid when a student enters. Institutions can then turn around and use that promise as a recruiting tool, Eyerly says. For students, he argues, “knowing you can be sure of what you’ll earn lets graduates make longer-term decisions around things like family formation, buying a home, and so on.”
It would seem there’s an obvious moral hazard here. What if students decide to couch-surf for five years after graduation, knowing that they’ll be able to count on their insurance payout? In response, Eyerly says he thinks two forces mitigate such concerns. First, he says, “If you’re wired to sit on your couch and play Xbox all day . . . you’re not likely to graduate. So, there’s a built-in filter for folks who are genuinely going to try and get real employment.” Second, he adds, “Human nature is such that, in economic terms, while people tend to ‘cheat’ in the short term, they rarely do in the long term. Five years of sitting on your hands, of not getting that ‘real job,’ is a long time to wait for a payoff.”
Asked whether students will be discouraged from choosing majors that carry a lower guaranteed payout, Eyerly says, “It might be much less scary than you think to go ahead and get that English degree—and we arm you with the information [on salary outcomes] necessary to make that decision.” For students who enter a service program after graduation, coverage is paused during their enrollment period and “[we] ‘pick you up’ on the other side,” says Eyerly.
The company is in the early innings. Illinois, Utah, and Arizona have approved Degree Insurance’s regulatory licenses, and it’s submitted applications in two dozen additional states. But the idea has promise. After all, as Eyerly notes, “[Higher education is] the only place you’d counsel someone you love to borrow five or ten times their net worth and make a single investment with it. That’s just not a smart investment strategy.”
If degree insurance does take hold, then colleges—which currently have no meaningful consequences when individual students drop out or struggle post-graduation—will be subject to two pressures that should benefit students. One is that institutions will be able to lower their premiums if students graduate, succeed after college, and don’t need to make insurance claims. Second, “income insurance” companies will have a very practical incentive to push their college clients to do a better job of preparing their students to succeed.
Insurance companies already provide societally beneficial sources of pressure, whether that’s rewarding safe driving, healthy habits, or functioning fire alarms. It’ll be intriguing to see if they can play that role in higher education, too.
