It is a fact that college costs are increasing and students are resorting to higher and higher amounts of student loans to finance their college degrees. These college loans come from a variety of federal and private sources and most are guaranteed by a co-signer (normally a parent or relative). According to the Consumer Financial Protection Bureau, studies suggest that 90 percent of these private student loans were co-signed in 2011. Life insurance should considered to protect these co-signers on many of these loans.
“Seven in 10 seniors (69%) who graduated from public and nonprofit colleges in 2013 had student loan debt, with an average of $28,400 per borrower.”
– The Institute for College Access & Success
While these loans are without a doubt a financial burden for the student, in the case of an untimely death these student loans can be a crippling blow to a co-signing family member reeling from a sudden loss. Even worse, the average debt amount can change depending on the college attended. A recent article by U.S. News & World Report, states that amounts can vary from $2,500 to $71,000. For a small percentage of students, those who sought advanced degrees, the numbers can go even higher.
The numbers are staggering but beyond the punishing repayment schedules, an unseen risk is out there for the co-signers of these loans. If a student borrower passes away, these parents or family members could suddenly find themselves with the added responsibility of an automatically defaulted student loan. While some lenders discharge these debts in the event of a death, many do not. Congress is considering action, but that could take years.
Another hidden time bomb involving student loans is in the event of the death or bankruptcy of a co-signer the entire loan could come due via an automatic default. The company would be within its’ rights to immediately demand full repayment of the loan under those circumstances. Granted the company must follow all loan conditions, but basically if they felt imperiled by the death of a co-signer they could take action to protect their financial interest.
According to the Consumer Financial Protection Bureau parents (and grandparents) should be aware of all the provisions of private student loans. Borrowers need to understand that some financial institutions are putting borrowers in default, even when loans are in otherwise good standing.
In the case where a loan is sold or repackaged to another loan provider, any assurance that a specific vendor would not trigger auto-defaults in certain situations might not be honored after your loan had been securitized by Wall Street.
If your student loan fall could be subject to “Auto-Default” due to the actions of a co-signer part of the risk could be mitigated through appropriate life insurance products. A licensed independent life insurance agent could help advise you on ways to protect your future.
If either of these occurs, the resulting financial tragedy involving student loan debt can cause havoc!
For some of these co-signers there is some relief. With loans backed by the federal government, student loans may be forgiven in the case of death or permanent disability. In recent years, nearly 75% of student loans will qualify for these programs. But the bad news is that as lone amounts go up, federal loan protection goes down, with those with the highest debts pending repayment would be from non-federal sources.
According to Aaron Steffens, Associate Director of Financial Aid at Luther College of Decorah, Iowa, “Federal student loans would include the Federal Direct Subsidized and Unsubsidized Stafford Loans, Federal Direct PLUS Loans, FFEL Subsidized and Unsubsidized Stafford Loans, FFEL PLUS Loans and Federal Perkins Loans. There are also Federal Grad PLUS loans that could be held by students in graduate school.” Aaron went on to point out that there could be more types of federal loans out there, but these would be the vast majority. (More information about death cancellation can be found at https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancellation/death.)
One way to protect co-signers from this risk is to purchase an insurance product designed to cover this type of exposure. Life insurance products can be designed to step in when death occurs and pay off the loan and depending on the loan amount any extra benefits could be than awarded to a secondary beneficiary.
The good news is that life insurance for a young adult in their 20s and 30s can be obtained with very little underwriting and inexpensive rates while the risk of death is low. Most insurance experts would recommend a simple level term life insurance policy rather than a decreasing term policy. Decreasing term over the years has become very expensive and out of date. Most companies concentrated on term policies and decreased the rates reflecting the new mortality rates and adjusted the underwriting accordingly. Fewer companies are now offer decreasing term policies and for those that do, the rates have not been adjusted for decades making them very expensive compared to level term.
While many might think of a product like mortgage life insurance that option could be rather expensive and is designed to protect a bank or an institution. A much better solution would be a level term policy whose amounts and beneficiaries can be tailored for the individual student loan and is really a better option allowing the insured and owner more control and options to keep or convert to permanent coverage.
Because each student’s loan insurance situations are different, it is a good idea to consult a licensed life insurance agent. He can work through the benefit options which will work best to protect both the student and the co-signer.
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