With student loan debt in the United States currently estimated to total $1.762 trillion, the price of higher education is quickly taking its toll on many households. Borrowers may be wondering if they need to consider their student loans when purchasing life insurance coverage. The answer to this depends on what type of loan the borrower has and who signed for it.
Who is Responsible for Paying the Debt?
Many people believe that student loan debt is forgiven if the borrower passes away. However, this is not always the case. It depends on a few factors, including whether the loan was federal or private, and whether the borrower had a co-signer.
Federal vs. Private Student Loan Debt
Federal student loans (without a co-signer) are the most straightforward case. By law, these loans are forgiven upon death or total disability, and family members or the estate are not responsible for paying them back. In this case, there is no need for any party involved to increase their life insurance coverage based on the loan.
On the other hand, private student loans may have different terms. Because private loans are issued through a private lender, the lender can dictate their own rules including the terms of death or disability. The best way to know for sure is to read the fine print.
If someone with unpaid private student loans and no co-signers were to pass away, their estate may have to repay the debt. A judge may order the sale of assets the borrower planned to leave to others (such as a house or car) to pay back the lender. In this situation, having an adequate amount of life insurance would help to eliminate this burden and leave those items to go to their original heirs.
Co-signing is when a parent or other adult agrees to be responsible for the loan should the borrower default. Co-signing is common for many different types of loans, including student loans.
For some federal loans, a co-signer must continue making payments even if the borrower passes away. This depends on the type of federal loan.
For private loans, the co-signer may have to continue making payments. The loan contract may also include an acceleration clause. This could mean the lender can make the balance of the loan due immediately if the borrower dies.
Spouses of Borrowers
Like co-signers, spouses may also be on the hook for making payments after the borrower dies. This will largely depend on:
- The state where the loan was taken out.
- If the couple was married at the time of the loan.
In some states, loans are considered shared or community property. Even if the surviving spouse did not co-sign, places with community property laws will require that they continue to make payments. This is another instance when having life insurance — and, thus, a death benefit — can help alleviate this burden.
How to Use Insurance to Protect Against Student Loan Debt
Whether a borrower should take out life insurance or get additional coverage to potentially repay student loan debt depends on whether they had a co-signer, the type of loan, and what state they live in. Borrowers and co-signers should look carefully at their loan terms and decide whether they need additional life insurance coverage.