Student loans have become a part of the educational landscape, with 65% of today’s college students saying that they’ll graduate with some debt, according to statistics reported by EducationData.org. This includes a national student loan balance of more than $1.6 trillion, including a private student loan balance of $135 billion. For those who have cosigned student loans, one of the often-overlooked financial protections is life insurance. Here’s what you need to know about life insurance for student loans, and when it makes sense.
What Happens When a Student Loan Borrower Dies?
In general, life insurance is designed to cover final expenses and take care of certain obligations, like debt, left by the deceased. When it comes to life insurance related to student loan debt, the first thing to know is what happens when a borrower passes. With federal student loans, when the borrower dies, the remaining balance is normally discharged once the death has been properly documented. This also applies to parent PLUS loans. In fact, with PLUS loans, the remainder is normally discharged if either the parent or the student involved passes. The story is different with private student loans. Private student loans typically require more rigorous underwriting and are made by private entities, rather than made by the government. While there are some private lenders that will discharge a student loan when the student dies, that isn’t always the case. In fact, in some cases, the loan becomes immediately due when the student passes. That is where life insurance for student loans becomes important.
Cosigners and Life Insurance for Student Loan Debt
Because of the nature of private student loans, there’s often a need for a cosigner. In many cases, students don’t have the income — and maybe not even the credit history — to qualify for a student loan without someone else to agree to take on the responsibility of loan payments. A cosigner to a student loan agrees to fulfill the debt obligation if the borrower can’t make payments. So, if the student dies and can’t finish paying off the loan, the lender can require the cosigner to pay back the loan. Because the requirement to repay the loan can cause a burden on the surviving cosigner, getting life insurance on the student can be one way to reduce the risk. When getting life insurance for student loans, make sure that the amount of coverage is enough to cover final expenses, plus pay off the total outstanding balance of the student loans. The policy should cover the student in the event of their death, and the beneficiary of the policy should be the cosigner. That way, if the student passes away in an untimely manner, the cosigner receives the benefit from the life insurance policy and can use the money to pay off the loan.
Life Insurance for Student Loans — on the Cosigner
It might not be enough to get life insurance for student loan debt related to the student borrower. You might also need to get life insurance on the cosigner. In some cases, the lender will require that the student loan debt become immediately due upon the death of the cosigner. Check the terms of the loan to find out what events trigger the entire remaining balance being considered immediately due. Another reason to get life insurance on the cosigner is that the student might not be able to make payments on the student loan. If the borrower doesn’t have the income to take over student loan payments and the cosigner passes, then the borrower may not be able to keep up with the payments. For that reason, it’s also a good idea to consider getting a policy for the cosigner, with the student borrower as the beneficiary.
Do I Need Life Insurance with Student Loans?
In the end, determining whether you need life insurance for student loans is a personal decision. If all of your loans are federal loans, then you may not need student loan insurance. Federal loan balances are normally discharged upon the borrower’s death. On the other hand, if some of your student loans are private, then it may make sense to invest in a policy large enough to pay off the obligation if needed. Speak with a financial advisor about your specific situation to determine which choice is right for you. Another consideration is whether your private loans come with a cosigner release. Some private lenders will allow you to remove a cosigner from a loan as long as the student borrower shows that they can take over payments and as long as they meet credit requirements. However, cosigner releases can take several months and not every lender offers them. Even if you do have a cosigner release, carefully consider whether insurance might make sense, just in case the cosigner or student passes before the release goes into effect.
Bottom Line
No one likes to think about the passing of a loved one. However, it’s something that needs to be considered, especially if you’re cosigning on a student loan. While it can be uncomfortable to take out a life insurance policy on your child, it might be one way to protect your assets down the road. Look at the options, and figure out if you can save money by getting a smaller policy, or focusing on term life. In the end, though, it’s up to you to figure out the best way to protect yourself if you’ve cosigned on a student loan.
