The financial mechanism that makes insurance work is in operation behind the scenes for most college loan repayment guarantee programs

Increases in subsidies aimed at offsetting the net cost for students will be self-defeating, as they are known to cause further inflation. When the government delivers a subsidy, in the form of a voucher, to a student, the student’s purchasing power increases. Unfortunately, institutions are aware of that fact-or at least will feel that change when it comes to students’ willingness to pay for enrollment. And whether they intend to or not, their prices will slowly creep up to capture that purchasing power, which means that the government will need to intervene with additional tax dollars again and again in order to keep the level of affordability constant.

Price controls won’t fix the problem. Ultimately, if colleges face a restriction on what they can charge, the number of seats they make available will likely decline. That will undoubtedly hurt the most disadvantaged people first.

Colleges that offer a loan repayment guarantee often utilize the financial services of a company called LRAP (Loan Repayment Assistance Program) to make it work

All this does not mean that we are stuck with the status quo. Students reap the benefits of a college education but also bear a large portion of the risk-and these students, often young people, are among the least well situated to handle that risk. But institutions are taking steps to mitigate their students’ financial risk. The rest of this essay explores these steps, including guarantees. It also reports the findings from a focus group that aimed to learn more about how students feel about the financial risks of investing in higher education and about the mechanisms that colleges have taken to mitigate them.

Mechanisms for Mitigating Student Risk

Loan repayment guarantees are one mechanism, among many, that colleges are beginning to undertake to quell students’ concerns about the risk of going to college. Markets have for a long time developed financial instruments to help people cope with risk. Insurance is, of course, the most well-known. Heads of households often take out life-insurance policies to ensure that their families will be cared for in the case of their untimely death. People who purchase these sorts of policies find the risk of that outcome untenable and are willing to pay a premium to absolve themselves of it. Life-insurance companies don’t sell policies as an act of benevolence; they sell them because they collect more in premiums than they pay out in benefits. There is nothing predatory in this transaction, as both parties benefit. Because an insurance company can pool risk across many individuals and even different types of policies, it has less of an aversion to risk than the individual. The same dynamic exists in higher education.

The idea of guaranteeing outcomes for their students might appeal to a college, but particularly for institutions without a sizable endowment, the risk to them could be quite large. Imagine, for example, that a college created a loan repayment assistance program after which the country promptly fell into a deep recession-one in which graduates struggle to get jobs, even those from the most selective institutions. The payouts could be ruinous.

The way around this problem is to outsource the risk to a financier who has the capacity to withstand these sorts of fluctuations in cost. In exchange for a fixed fee from the college, LRAP makes payments to students, or on behalf of students, based on the terms of their agreement with the college.

LRAP, which is the single provider of this type of financial service, reports that it supports loan repayment programs at some 120 undergraduate colleges and is seeing annual growth of about 20%pany clients tend to be private, nonprofit institutions with good student outcomes but lesser national name recognition. Their client list includes Seattle Pacific University, Keystone College, and Cairn University. These colleges often use loan repayment guarantees explicitly as a marketing tool to recruit students to enroll. Most don’t offer loan guarantees broadly to enrolling students; the guarantees are instead included in student financial-aid packages to entice students to enroll who might not otherwise have done so.