How Degree Insurance Works for Schools
The company sees its primary customer as the educational institution, which would then reap the rewards of the renewed sense of confidence and postgraduate security that prospective students would have.
As Degree Insurance sees it, a college would purchase its American Dream Insurance (ADI) for a given group – the example they give is an entire incoming class of undergraduate students. This policy guarantees this incoming class that they will earn a given salary for the first five years after they graduate. This baseline salary is calculated “actuarially” based on one’s major and college.
This offers several advantages for the school purchasing the insurance, Degree Insurance says. For example, it allows the school to tell incoming students that if they graduate with a certain major, they can expect to earn a certain amount in their first five years in the workforce. In addition, it represents a fixed outlay for the school, which simply pays the company based on the number of students it wishes to cover. This in turn makes it easier to factor into a school’s budget in the long run.
The design of ADI also encourages other positive outcomes beyond reaffirming students’ confidence that their degree is worth it. Because it only kicks in if students graduate from the school that has the insurance, it likely further incentivizes students to finish their degrees and avoid transferring out. All of this helps keep the school’s graduation and retention rates up, which are key performance indicators for most large schools.
The major downside for colleges is how untested this approach is. College is already an expensive proposition, and while administrators are eager to boost enrollment numbers, they also want to keep costs as low as possible. And so far, there is limited evidence that blanket ADI coverage for their students will attract enough students to justify the associated costs. Many of the company’s claims come from outside studies citing students’ growing discomfort with the uncertainty of where a college degree will get them relative to the cost. But, fortunately for Degree Insurance, they are in the second semester of a small pilot program with Augustana College that has offered some data on enrollment increases, though the size and design of the pilot still leaves much to be desired.
Degree Insurance is part of a growing trend of colleges, loan providers, and others trying to assure their customers (students) that a college degree is still worth it.
Augustana College’s Experience
Degree Insurance’s primary offering is its American Dream Insurance coverage. Last year, the company found their first potential partner institution in Augustana College in Indiana. They agreed on a small pilot program, executed at the company’s expense, in order to have results on hand that backed up their claims about boosting enrollment. Indeed, the pilot program did show some of these results.
The company claims to have helped Augustana turn around an anticipated year-on-year decrease in its transfer applicants. Instead, the college saw transfer enrollments rise by 20%. The company estimated the cost of the program would have been $60,000, but that the increase in enrollment would have earned the school $250,000 in revenue the first year alone, with total revenue gains reaching $750,000 after four years.
The case study appears to show that Augustana benefited from being able to advertise ADI to potential applicants, encouraging students to come to Augustana under the premise they could get their future earnings insured. In reality, though, there was no guarantee any of the students would actually get the coverage since only the first twenty transfer students to apply were granted ADI.
This makes it difficult to parse how much of the enrollment increase Augustana saw that semester was based on students actually receiving ADI, and how much was based on students’ hopes they would win what was effectively a lottery for the salary insurance program.
Degree Insurance however insists that changing the perception that “college isn’t working for me” encourages enrollment and reduces the dropout rate, both factoring into a college’s bottom line. The company points to an analysis that concludes that most colleges would break even on the cost to provide the product within 3 years, actually resulting in a net-positive investment for the university in years 4 and 5.
But whether or not those statistics stand the test of time, one indicator seems to be positive for the company: Augustana was impressed enough with the results of the fall pilot program that it announced it will continue it into the spring 2022 semester, albeit with an even smaller cohort of ten students.
“Students are seeking out ways to take their next step with confidence and reassurance, and this program fits what they need…This may be the extra incentive they need to pursue an Augustana education,” said Kent Barnds, Augustana’s Executive Vice President of External Relations.
“Students from the least confident generation in US history enroll wondering ‘Will it be worth it?’ We answer those questions.” - Degree Insurance
How Degree Insurance Works for Students
In the case of Augustana, the company is betting that just the chance of having your earnings guaranteed for five years through ADI is enough to boost applications and make a school’s investment worthwhile. But if this idea is to catch the attention of larger schools, there likely needs to be broader application within student bodies. This would give prospective students weighing their college options a guarantee that they’d have access to ADI or a competing product if they enrolled.
While still largely a theoretical idea that hasn’t proven its scalability, here is how Degree Insurance says it would work on the student side: A student would be guaranteed a particular salary after graduation based on their major; the company uses $50,000 a year for an engineering degree, $38,000 a year for an English degree, just as examples (not real guaranteed incomes).
To remain eligible for the income insurance program, participating students must work in the United States after graduating. If the graduate decides to enroll in graduate school, serve a church mission, participate in Teach for America, or takes a similar path that temporarily takes them out of the job market, the coverage will be paused during those years. Once the graduate accepts their first job in their field, the coverage begins.
If a graduate was unsuccessful in earning what was promised in those five years after graduation ($250,000 cumulatively for the engineer, for example), they would submit paperwork, such as tax returns or other common, verifiable forms to show how much they did earn in the five years after graduation. Degree Insurance cuts a check for the difference between the engineer’s five-year income and the quarter million dollars they were promised in their first five years.
There are of course potential upsides for students, including first and foremost a greater confidence in the return on investment that college offers. The company describes the dilemma facing students as one of faltering faith in higher education systems: “Students from the least confident generation in US history enroll wondering, ‘Will it be worth it?’ We answer those questions,” a quote from their website says.
Another advantage is that, like the institutions that take out this coverage, students can plan more accurately for the future when they know how much they will earn, or at least the minimum amount they will earn. This in turn could also allow students to take on responsible debt loads that are appropriate for their expected earnings after graduation.
Of course, there are some downsides to the idea of ADI, as it relates to students’ best interests. The most obvious one is that even if colleges see greater enrollment because of Degree Insurance’s products, they may opt to pass on the costs of the program to students. So instead of being a perk of going to a particular school, it may end up as part of the fees and expenses paid by a student on top of tuition.
Another set of downsides may be harder to quantify. This relates to how a student weighs what academic and life decisions to make during their college years. For example, some may be disincentivized to transfer to a different school or otherwise change their academic plans – even if it is the best decision for them – for fear of losing ADI coverage.
How Does Degree Insurance Compare With Income Share Agreements?
Like Degree Insurance’s offering, Income Share Agreements are a way to spread out the risk of a college degree not paying off. An ISA is essentially a student loan where you pay a percentage of your after-graduation salary to the loan provider, for a certain number of years. A number of schools, including Yale, have tried ISAs only to dump them later.
The major downside of an ISA for students (and for the colleges trying to pitch them on the idea) is that if a student makes a high salary after graduation, they’ll have to hand over quite a bit of money to their financial backers at the ISA. And as with all loans and financial instruments, the devil can be in the details, with different ISAs asking for different percentages or for longer periods of repayment. They can also be difficult to pay in full and end early if a student simply wants to extricate themselves from the arrangement.
Though traditionally ISA providers have tried to differentiate their product from run-of-the-mill student loans, they have come under scrutiny from the Consumer Financial Protection Bureau for this practice. In September 2021, the CFPB issued an order saying that an ISA does provide “private education loans” to borrowers, since the ISAs are a form of debt and are given to borrowers for education purposes.
It remains unclear what effect the renewed scrutiny on ISAs will have on their future, or if this provides an opening for Degree Insurance to advertise its own product as a better alternative, since it clearly is not a student loan, and since DI expects colleges – not students – to be their primary customers. While ISAs are something of a known quantity, Degree Insurance’s novelty and so-far unbesmirched reputation may be enough to improve uptake relative to ISAs. Whether one gets the upper hand over the other remains to be seen.
Here are some schools that offer ISAs, though this is not meant to be a comprehensive list: Purdue University, Lackawanna College, Clarkson University, Messiah College, University of Utah, and Robert Morris University. The Make School offers them for computer science studies, while Norwich University offers them to students connected to the military, and Colorado Mountain College offers ISAs for noncitizen students.
Degree Insurance’s Focus on Post-Grad Outcomes Reflects Broader Educational Trends
Degree Insurance, and its investors, are placing a large bet that what students crave is more certainty about their lives after graduation. Degree Insurance is part of a growing trend of colleges, loan providers, and others trying to assure their customers (students) that a college degree is still worth it. And while data strongly supports the assertion that a degree will improve lifetime earnings, there are enough anecdotal and systemic exceptions to this rule that future students will likely be more circumspect about their college choices.
Some may even choose not to attend a traditional college, but instead opt for vocational training, a certificate for an in-demand job, or a coding bootcamp. College is no longer the only game in town for those seeking economic mobility or financial success.
We live in an outcomes-based world, and more focus is being put on data and analysis around salary and job outcomes of colleges. The sooner colleges and the constellation of financial and government institutions that support them understand this, the better poised higher education as a whole will be to weather trends of decreasing enrollment and increasing skepticism among students.
It is in this context that we see companies like Degree Insurance setting up shop and trying to prove their business model. For all its shortcomings, the company is trying something new that, in its best form, aims to empower students to make the best long-term decisions for themselves.