A career in cosmetology can be a fun and fruitful path to pursue, but some consumers are hesitant to attend cosmetology school. Why? Because many career schools struggle to remain solvent and it’s not uncommon for them to shut down suddenly. This is why all parties can benefit from having a cosmetology school bond. Students gain protection and schools gain credibility.
A cosmetology school bond—also referred to as a barber school bond, esthetics school bond, or manicure school bond depending on what your school’s specialty is—is a type of surety bond. Any cosmetology school that collects tuition from students must hold a cosmetology school bond in order to operate. Essentially what this bond does is help protect students who prepay tuition.
Let’s take a closer look at how cosmetology school bonds work.
Some states require cosmetology school bonds in order for cosmetology schools to obtain and maintain the license they need to operate legally. The point of a cosmetology school bond is to protect students’ unearned, prepaid tuition in the event that a breach in contract between the student and school occurs.
The required bond amount varies by state, but is usually a minimum of $10,000. However, some states base the required bond amount on the amount of gross tuition receipts.
There are three different parties that make up a cosmetology school bond.
The obligee. The obligee is the party that requires the cosmetology school bond be taken out—usually this is the state.
The principal. The party that requires the surety bond is known as the principal. In the case of a cosmetology school bond, this is the cosmetology school that requires licensing.
The surety. The underwriter of the bond is the surety and they are the one that sells the bond to the principal and who pays out any initial claims against the bond after investigating the validity of the claim.
It’s worth noting that even though the surety initially pays out any valid claims against the cosmetology school bond, the principal does need to pay the surety back. A surety bond is not an insurance policy, at least not for the principal. A cosmetology school bond acts more as an insurance policy for the consumers it aims to protect, which in this case is the students paying tuition.
To better understand how a claim could be filed against a cosmetology bond, let’s look at an example. Susan is attending Beautify Cosmetology School with a goal of obtaining a cosmetology license. Unfortunately, Beautify Cosmetology School has been struggling to keep their doors open and had no choice but to shut down. This is upsetting and disruptive for Susan, but the bigger issue is that the school didn’t refund her tuition deposit. Holding onto this unearned income is against the rules of the cosmetology school bond and Susan now has a right to file a claim against it. Luckily for Susan, a cosmetology school bond guarantees a full refund of her prepaid tuition if her claim is found to be accurate.
After an investigation, the surety finds Susan does have a right to file a claim and pays her out up to the bonding capacity (more on that in a minute) and she is reimbursed for her tuition. The school is not off the hook here—they now owe the surety the claim amount and may even need to pay additional fees or interest to them.
To better understand how a cosmetology school bond works before you buy one, it’s worth knowing these terms.
Bonding capacity. The bonding capacity is the maximum amount someone can claim against the cosmetology school bond. For example, if the maximum bonding capacity is $20,000 then a claim can’t be filed for more than $20,000.
Bond premium. How much the principal spends to secure the cosmetology school bond is the bond premium.
Bond term. How long the cosmetology school bond is active for is referred to as the bond term.
How much a cosmetology school bond costs (remember—this is the bond premium) varies greatly based on a handful of different factors. Your personal credit score is the biggest factor taken into consideration and the higher your personal credit score is, the better bond premium you’re likely to secure. Your business credit scores, assets and liabilities, and industry experience can also impact how much you’ll spend on a cosmetology school bond.
Usually, the bond premium is a certain percentage of the bonding capacity. If the bonding capacity is $10,000 and you’re offered a rate of 1%, you’ll spend $100 dollars to obtain the cosmetology school bond.
Learn more about the bond premium you’ll qualify for if you need a cosmetology school bond with Worldwide Insurance Specialists, Inc today!