Paying for education is usually one of the largest expenses facing American families. As we’ve seen over the last two decades, college tuition has been steadily climbing higher. Given the costs, more and more people wonder if they should buy tuition refund insurance. This article covers what it is and gives tips to determine whether it is right for you and your family.

The High Cost of Higher Education

The increase in annual tuition rates from 2001 to the present can be seen below:

Private: $16,987 to $41,411
Out-of-state: $10,101 to $26,809
In-state: $3,583 to $11,171

These costs represent an increase of 144% to 212% in a matter of 20 years! And keep in mind that tuition does not include room and board, which can be an additional ~$10K/year.

Once the contract is signed, you are on the hook for the entire year of expenses, even if the withdrawal is involuntary. An account that is not paid in full by the due date is subject to late fees and other charges.

With such a hefty price tag, you are left with the tough question of whether to purchase tuition insurance to protect your investment. Here are key points that our Bethesda, MD fiduciary financial planning firm believes parents should consider when deciding whether tuition insurance is right for them.

What Is Tuition Insurance, and What Does It Cover?

Similar to how we insure our home and auto, you can insure your child’s education to protect against the unexpected. Tuition insurance, also referred to as a tuition refund plan, reimburses certain education-related expenses if your child is forced to withdraw. The insurance is typically geared toward higher education, but some insurance programs cover K-12 as well.

Generally, one of the following conditions must be met to satisfy a reimbursement claim:

Death in the family
Chronic injury or illness
Serious injury, disability, or illness
Mental health condition (i.e., anxiety, severe stress, or depression)

Most insurance plans do not provide coverage if the student withdraws voluntarily, feels homesick, or gets expelled. A few carriers do, but they typically reimburse only up to 50% and charge a higher premium.

While having health insurance is a must, it does not provide any benefits under these circumstances. The amount reimbursed by tuition insurance is dictated by the type of policy and reason for withdrawal. Most plans pay out 75% to 100% of the amount lost after the withdrawal. The outlay is minimal, as tuition insurance fees average ~1% of total annual tuition, depending on the policy’s bells and whistles.

How to Get It

Tuition insurance is generally purchased in one of the following methods:

Directly from an insurance company (you can find a list here)
Directly from the educational institution

Companies offer various tuition insurance products, making it important for you to read the fine print to understand what the insurance covers and up to what percent. For example, some plans cover only tuition, while others include on-campus room and board.

You should be aware that many providers exclude certain pre-existing medical conditions and off-campus living expenses. Recently, there have been inquiries into how the coronavirus pandemic fits in this framework. Epidemics and pandemics are normally excluded, but some insurers have loosened their guidelines and covered withdrawals for students who contracted COVID-19.

Who Should Get It

The question of who should purchase this insurance is not always cut and dry, although certain situations make it a more attractive option:

The student has a prior medical history.
They are attending an expensive college.
The family has multiple kids attending college at or near the same time.

It is worth noting that most colleges and universities offer some level of refund if you withdraw for any reason within the first five weeks. This refund policy is similar to federal regulations for the return of financial aid upon a student’s withdrawal. Tuition insurance generally covers the current semester and not the entire calendar year.

If you are a parent with multiple children attending college at or near the same time, tuition refund insurance might be a wise investment as the costs can quickly add up!

Also, if you are cosigning on student loans for your child, obtaining tuition insurance is a good idea as it ensures you will be protected if your child is forced to withdraw. Otherwise, you will be on the hook for the loan balance.

When it comes time to file a claim, a signed letter from a licensed health professional or doctor verifying the student’s condition is required, along with a few additional forms.

As with other insurance, tuition coverage can provide you with peace of mind, something that is hard to put a price tag on. If it makes you sleep better at night, then it’s probably worth owning given the fairly low premium.

In the end, you should decide whether to buy it based on your family’s financial situation and child’s medical history.

Discuss your situation with a fee-only financial advisor.

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