Today, most people would agree that college is a means of helping to advance a career path and future income. However, this educational goal often comes with a mountain of student loan debt. That price tag can be optimistically offset by the vision of a long and financially rewarding career.
Plans may not always work out as we envision, but what if something tragically affected the student borrower? What happens with all of that debt, and is there a financial ripple effect for anyone else?
The numbers are staggering for student loan debt!
- Between 2004 and 2016, student loan debt rose more than 250 percent from $350 billion (2004) to $1.31 trillion (2016). In 2016, it actually represented the second-highest household debt item in the U.S.—just behind housing loans.[i]
- The average class of 2016 college graduate has $37,000 in educational debt—which is 6 percent higher than 2015 reporting.1
- By early 2017, there were approximately 44 million borrowers (20 to 30 years old) with more than $1.4 trillion in student loan debt—and an average monthly payment of $351.[ii]
Who’s really on the hook for the debt?
Now, take all of that information and tack on a bigger worry. What if the student borrower had an untimely death? What if they didn’t have an estate or spouse? Isn’t the student loan debt just written off? Unlike auto or home loans, there’s no collateral property to sell. This complication can result in the debt outliving the student borrower which sometimes creates a sinkhole for others. Why? Let’s look at how the type of loan impacts loan forgiveness or broader consequences.
- Public Educational Loans: Public educational loans are typically set up with the student listed as the borrower and not requiring a co-signer. According to Federal Student Aid guidelines[iii], if the student [borrower] dies before the federal school loans are repaid, then the loans are forgiven. The debt will be cancelled after family members provide the Federal Student Aid office with the required proof of death.
- Private Educational Loans: If the student needs additional funding and/or doesn’t qualify for federal student aid, then a private loan may be an option. However, many student borrowers don’t have the credit history or established income to qualify on their own for a private student loan through a bank or other financial institution. Since the 2008 banking crisis, most private loans now require a co-signer. In fact, by 2011, more than 90 percent of private student loans were co-signed.[iv]
But here’s the wild card. Student loans from private financial institutions have their own set of rules based on the lender’s policies. In many cases, if there is a co-signer on the loan and the student borrower dies, private lenders will try to pursue repayment from the borrower’s estate. If there is no estate, any co-signers could be responsible for the student’s outstanding school loan debt. And the snowball just keeps rolling. Some loans may even have acceleration clauses that require payment in full upon the borrower’s passing.
Just imagine this. Your family is devastated from losing you. As they’re recovering and planning a different future, they’re notified that (as your loan co-signers) they could be inheriting your five- to six-figure academic debt as well.[v]
Time to put your Plan B in place
Whether you’re the student, the parent of one or a gracious student loan co-signer, do a little research, understand your options and create your Plan B. Big picture? As the numbers indicate, student loan debt today could equal the cost of a home or minimally a significant down payment, so what can you do to minimize your co-signers’ risks?
Life insurance for school loans
Considering the financial ramifications, it’s becoming more commonplace and lender-recommended for you (or the co-signers) to take out a life insurance policy on you to cover the student loan debt should you pass away.
(Term life insurance coverage is often chosen given the simplicity, lower rates, and limited term period.) When estimating the coverage amount, keep in mind that the policy should cover the student loan debt amount and any potential interest that could accrue during the life of the loan.
Life insurance to cover my student loans if I die? Yes. It’s a way to give your co-signers some assurance that supporting your academic goals won’t become a mistake for them later. Talk with a life insurance agent. This policy could be a way to cover that debt for your co-signers, but it also could offer an additional cushion of protection at discounted rates because you’re young.
Once you account for that five-figure student loan debt in your policy, add a little more to the coverage amount in anticipation of future plans down the road—like a home, spouse or child. In fact, the average rate on a $100,000, 20-year term life insurance policy for a healthy 25-year-old is approximately $10 per month[vi]. That’s comparable to two specialty coffees a day. It’s a little effort to get some peace of mind as you head off to start your day.
[i] Student Loan Debt Compared to Other Household Debt, 2004 – 2016, ProCon.org (http://college-education.procon.org/view.resource.php?resourceID=005459) (last updated 4/20/17)
[ii] “A Look at the Shocking Student Loan Debt Statistics for 2017,” Student Loan Hero (https://studentloanhero.com/student-loan-debt-statistics/), July 11, 2017.
[iii] “Forgiveness, Cancellation and Discharge with Discharge Due to Death.” Federal Student Aid, an Office of the U.S. Department of Education. (https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/death#proof – last accessed: July 10, 2017)
[v] Check the loan requirements in residential community property states (AZ, CA, ID, LA, NV, NM, TX, WA or WI) on how student loan debt could impact a spouse.
[vi] Terms4Sale.com (https://www.term4sale.com/) with composite term life insurance premium rates for a $100,000, 20-year policy as: under $10 or less/month for a female, 24, preferred plus, non-smoker; and $12 or less on average for a male, 24, non-smoker from an insurer with an A.M. Best rating of A- or higher.