Does College Require “Financial Risk Management?” Yes, It Does.

The word “risk” in financial terms generally refers to the odds of incurring monetary losses from a given endeavor.  Businesses think of risk in terms of losses due to theft or liability, and investors research their decisions to ensure that their assets appreciate, rather than reduce in value.  Research, planning, and using preventive measures are all part of an effective “risk management” strategy in both business and investing.

But, does risk and financial “risk management” pertain to college?  At many levels, yes, it does, and the Federal Reserve Bank of Philadelphia seems to agree.  First, consider the state of college in the United States:  Out of 29 developed nations, the U.S. currently ranks 15th in college graduation rates. On average, only 36% of U.S. students finish a bachelor’s degree in four years, with 58% of students taking six years to complete a four-year degree.  That is, if they aren’t among the estimated 42% or more that drop out nationwide.  College planning in the U.S. traditionally has focused on getting in to college, when in light of the realities, families and students should be focused on graduating from college.

The concept of “college failure risk” was underscored in late 2009 by a working paper from the research department of the Federal Reserve Bank of Philadelphia, who recognized that U.S. college failure rates are significant, perhaps even enough to require students to take out “failure insurance” to help offset losses.  In their report, they pointed out that 47% of former students who have student loan debt have little to show for it, since they did not earn a two- or four-year credential.  The insurance scheme examined by the Reserve Banks, however, may be cold comfort to those students, since the premiums would represent approximately 3% to 12% or more of the total college cost, and pay off only 10% to 40% of the debt.

In light of the apparent financial risks, how might families increase the odds of college success?  Effective risk management strategies against college failure would include:

1.  Data-Driven Planning

A 2009 study sponsored by the Gates Foundation found that the majority of college students spend little time planning for college, especially those that don’t graduate.  Parents and students need to “qualify” themselves to make good college decisions by both understanding the breadth of college in the U.S., and then individual schools in that context.  Key questions to answer are:  What are the most common degrees chosen by students, and their respective job outlooks?  What types of schools have the highest and lowest graduation rates?  What are the most common reasons for student success and failure?  If parents and students can’t answer these key questions, they’re not ready to make college decisions.

2.  Student Factors

The Reserve Bank aptly pointed out the importance of “student characteristics,” although in their quantitative-theoretical model, the issue was oversimplified.  Student factors aren’t limited to just GPA and SAT scores, and using these solely to gauge future performance has limitations.  Levels of independence, engagement in their own learning, social abilities, and many more factors will play in to a student’s ability to succeed.

We also live in an age where many students have special needs, which are often overlooked.  Transitional planning for a student with Attention Deficit Disorder, anxiety problems, or other issues is a highly specialized area, and will take more skill than traditional college planning can offer.  Working with a professional who understands in-school student failure is the best way to identify and control risk factors prior to college, and to develop preventative measures far before the student begins classes.

3.  In-College Support

In addition to the strategies of data- and student-driven planning is ongoing support while in college.  Problems that can affect student performance typically occur while the student is enrolled and actively taking classes.  There is an assumption by colleges that if the student is having problems, they will seek help, but multiple studies from 2007-09 show that this is not the case.  On average, only 1 in 5 students say that they would seek help.  Having regular, ongoing support during college is often a way for problems to be caught early and for parents to be informed of them.  But the most effective types of support typically aren’t through the college, but private services, since schools don’t typically seek out students that aren’t doing well.  Even if a student does get help at school, federal privacy standards may preclude the college from contacting parents without the student’s consent.

With the trends toward increasing college costs, longer graduation times, and high levels of students who don’t finish, college attendance carries with it financial “risk,” and the need to manage that risk.  In order to reduce the risk and maximize the benefits of college attendance, data-driven, comprehensive planning and ongoing support is needed to increase the likelihood of success and to help to mitigate the risk of college failure.