Tuition Refund Insurance
Tuition refund insurance, also referred to as tuition insurance, provides coverage in case a child is forced to withdraw from college for medical or other reasons. A handful of colleges (and private secondary schools) offer tuition refund insurance through a third party. (See also loan repayment protection.)
Tuition refund insurance is generally not recommended for college
students except when the student has a serious illness that may force
the student to withdraw from school. However, tuition refund insurance
plans may include a preexisting condition exclusion of 6 months to a
year that can preclude coverage in such situations. Some plans will
waive the preexisting condition exclusion after 6-12 months of
coverage. Since most 17-20 year olds are healthy, tuition insurance
is often not financially worthwhile, but does provide peace of mind.
Because of the peace of mind benefit, tuition refund insurance is more likely to be of interest to parents whose children are attending more expensive colleges and who are paying most of the cost out of pocket.
College Refund Policies and R2T4
Before deciding whether to get tuition refund insurance, it is a good idea to review the college's refund policy.
The federal regulations in 34 CFR 668.22 concerning the return of "unearned" federal student aid, nicknamed R2T4, are rather complicated. The gist is that federal student aid that was or could have been disbursed is earned pro-rata based on the percentage of the period of enrollment that was completed through the date of withdrawal. If the percentage is more than 60% the student is considered as having earned 100% of the aid. Any unearned aid must be returned to the government (in the case of grants) or the lender (in the case of loans). There is a preference order for the return of the student aid that generally returns loan funds before grants.
Many colleges have refund policies that parallel the R2T4 regulations, but not all colleges provide such generous refund policies since there are no statutory or regulatory requirements for refund policies. Some colleges limit the availability and amount of refunds after 30 days into the school year. Refund policies may differ depending on whether the student is receiving financial aid. If a college does not permit refunds and a student withdraws before the 60% threshold, it is possible that the student could end up owing money to the school. For-profit colleges are more likely than nonprofit and public colleges to have refund policies that differ from the R2T4 regulations, but it is best to check each college's refund policy. (R2T4 doesn't apply to private K-12 tuition and many private elementary and secondary schools do not allow refunds, so tuition refund insurance may be more desirable at higher cost private schools.) Aside from such differences between a college's refund policy and the R2T4 regulations, the other main risk is for the family's portion of college costs. This includes amounts paid out of pocket and amounts paid with non-need-based loans such as unsubsidized Stafford, PLUS and private student loans.
Colleges that offer college-specific tuition refund insurance are less likely to have generous refund policies. It is unclear which is the cause and which is the effect. At these colleges the tuition refund insurance may be as much for the benefit of the college as for the benefit of the student.
Also potentially relevant are the discharge provisions on education loans. Federal student loans provide for a discharge of the debt in the event of the death or total and permanent disability of the student or if the school closes before the student graduates. Most private student loans do not have such discharges.
Most tuition refund insurance programs will provide coverage for medically necessary withdrawals due to illness or injury, death of the student or death of the parent or guardian. Some will provide coverage for involuntary job loss or relocation, mental health withdrawals, voluntary withdrawal and dismissal or suspension for academic or disciplinary reasons.
For coverage in the event of the death of a parent or guardian, it is usually better to obtain term life and disability insurance coverage sufficient to replace the wage-earner's income plus college costs. (While many colleges will use professional judgment to exclude insurance proceeds from income on the grounds that it is a one-time event that is not reflective of ability to pay, most will still count it as part of the family's assets. This can reduce aid eligibility by up to 5.64% of the asset if it is treated as a parent asset and 20% if it is treated as a child asset. For this reason it is usually best to increase the term life insurance coverage enough to pay for college costs in addition to providing income replacement.)
Be sure to ask whether the coverage is full or partial. The coverage may involve coinsurance where the tuition refund will be reduced by a percentage, typically 10% to 40%. In most cases coverage for death or medically necessary withdrawals is 100% (mental health is 60%). But in all cases the benefit is reduced by the amount of any refund from the school.
Also ask about exclusions. Many plans exclude suicide or intentional self-injury, injuries from participation in protests and demonstrations, and withdrawals due to the use of controlled substances or alcohol abuse.
Tuition refund insurance typically costs 1% to 5% of the face value of the coverage per year, ranging from $100 to $1,000 depending on the college's costs and claim history.
Companies offering Tuition Refund Insurance
Tuition refund insurance policies are offered either through selected colleges or through group plans. The group plans are available for use at any accredited college.
Only one company offers a group policy. GradGuard Tuition Insurance is a group tuition refund insurance policy offered in conjunction with membership in College Parents of America. Families can enroll at any time (not just at the beginning of the academic year) and can pick the amount of annual coverage from $5,000 to $50,000 in $5,000 increments. (Coverage for each term is half the annual coverage.) $5,000 in coverage is automatically provided with membership in College Parents of America. Families who purchase at least $15,000 in coverage also receive the "Student Protection Plan" which includes emergency medical evacuation insurance, small gadget theft insurance, five-year warranty extension protection, and computer repair for physical damage and virus damage. All policy levels include identity protection and resolution services. The policy provides 100% coverage for medical disability withdrawal or for death of the tuition payer or student, and 75% coverage for withdrawal due to emotional, nervous or mental disorders, up to the coverage limits. The policy is underwritten by Markel Insurance.
Three companies offer tuition refund insurance through colleges:
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