Insuring College Failure Risk

36 Pages Posted: 7 Jan 2010

See all articles by Satyajit Chatterjee

Satyajit Chatterjee

Federal Reserve Bank of Philadelphia

Felicia Anamaria Ionescu

Colgate University

Date Written: November 1, 2009


Participants in student loan programs must repay loans in full regardless of whether they complete college. But many students who take out a loan do not earn a degree (the dropout rate among college students is between 33 to 50 percent). The authors examine whether insurance against college-failure risk can be offered, taking into account moral hazard and adverse selection. To do so, they developed a model that accounts for college enrollment, dropout, and completion rates among new high school graduates in the US and use that model to study the feasibility and optimality of offering insurance against college-failure risk. The authors find that optimal insurance raises the enrollment rate by 3.5 percent, the fraction acquiring a degree by 3.8 percent and welfare by 2.7 percent. These effects are more pronounced for students with low scholastic ability (the ones with high failure probability).

Keywords: College Risk, Government Student Loans, Optimal Insurance

JEL Classification: D82, D86, I22

Suggested Citation

Chatterjee, Satyajit and Ionescu, Felicia Anamaria, Insuring College Failure Risk (November 1, 2009). FRB of Philadelphia Working Paper No. 10-1, Available at SSRN: or

Satyajit Chatterjee (Contact Author)

Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States
215-574-3861 (Phone)
215-574-4364 (Fax)


Felicia Anamaria Ionescu

Colgate University ( email )

13 Oak Drive
Hamilton NY 13346, NY 13346
United States


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