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College enrollment has dropped nearly 6 percent since fall 2019. Sinking demand for higher education has brought the cost of tuition down, which is good news for students but has put financial pressure on institutions. Some colleges have already closed, and it is likely that more institutions will collapse as funding from pandemic-era stimulus bills runs out. It’s time for Congress to start thinking about how to manage this potential wave of college closures.

Occasional college closures are inevitable. In a dynamic higher education marketplace, colleges will sometimes close as new and better providers of education come along. But it is imperative to ensure that closures occur in an orderly fashion and that students have opportunities to finish their degrees when colleges shut their doors.

Too often, that doesn’t happen. In 2016, ITT Technical Institute closed suddenly after the Obama administration took a number of regulatory actions against the chain that made continued operations unsustainable. Tens of thousands of students had their educations disrupted mid-degree. Few could transfer their credits to other institutions and complete their studies there: even ITT Tech’s own website from Sept. 2016 noted, “It is unlikely that any credits earned at the school will be transferable to or accepted by any institution other than an ITT Technical Institute.”

Many of ITT Tech’s students received a consolation prize: the Education Department forgave their student loans under the closed-school discharge program. If students at a shuttered institution cannot complete their education (either at the college or by transferring), they can get their federal loans canceled. Loan discharges associated with ITT Tech alone have since topped $1 billion, mostly courtesy of taxpayers. And ITT Tech is among hundreds of schools that failed during the 2010s.

ITT Tech’s students got their loans forgiven, but they never received what they originally came for: a college degree or certificate. While the Biden administration has proposed policies that would make it easier for students to receive discharges when colleges close, little attention has been paid to ensuring students at closed colleges can actually complete their education.

Fortunately, there is a solution that will both give students at closed colleges a better shot at finishing their programs and protect taxpayers from having to pay for closed-school discharges. The idea is simple: Congress should require colleges dependent on federal student loans to purchase insurance on the private market to reimburse taxpayers when closed-school discharges are granted.

The immediate benefit of this policy is to transfer the financial responsibility for closed school discharges from taxpayers to insurance companies. These companies will in turn charge premiums to the colleges they insure. This will guarantee that colleges themselves, not students and taxpayers, ultimately bear the costs of college closures.

But the larger benefit of an insurance requirement is to incentivize better behavior from colleges. Insurance companies will charge higher premiums to institutions where the risk of a closed-school discharge is greater. Just as homeowners can lower their insurance premiums by installing fire alarms, colleges could lower their premiums by taking action to reduce the risk of a closed-school discharge.

One way to do this is more prudent financial management. But another—and better—way to reduce the risk of discharges is for colleges to put policies in place that will ensure students can complete their education in the event of a closure. Colleges will need to maintain serious plans to wind down operations when closures threaten. They must enter into agreements with other institutions to allow students to transfer their credits after a closure (currently students lose nearly half their credits upon transfer). These plans and agreements must be credible enough to satisfy a private insurance company with its own money on the line.

If students at closed colleges complete their educations, they are not eligible for loan discharges. But they will nevertheless obtain what they originally went to college for: a degree or certificate that enhances their earning potential. Enabling students to realize economic opportunity, not simply forgiving their loans, should be the overarching goal of higher education policy.

A new wave of college closures looks possible, and it will be disruptive for higher education. But Congress can ensure that students and taxpayers are protected by implementing an insurance requirement for colleges that rely on federal funding. This won’t just change who bears the costs when colleges close. It will also better align colleges’ incentives with the interests of students. America’s higher education system will be stronger for it.

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