If you have a co-signer on your student loans you need to read this article. Depending on the situation (type & amount of loan), you may need to get life insurance to protect your co-signer.
Do you have student loans? Figuring out how to pay them back is overwhelming enough. Now you’re telling me that I have to worry about what happens to them after I die? Jeez, do I really have to think about that too? Yes, yes you do! If you have a large amount of private student loans with a co-signer, you need to get life insurance so that your co-borrower is not stuck owing the balance of your loans if you die.
When I graduated college, I had over $125,000 in student loan debt. It was so much money, I couldn’t wrap my head around the tens of thousands of dollars I had borrowed each year. It also didn’t click that in order for me, an 18-year old, to borrow that much, someone (my mom) had to co-sign the loans and become a co-signer. I had to pay over $1300 each month towards my student loans. I couldn’t imagine my parents being able to afford that much each month (in addition to their own bills) if I died. So, I took out life insurance for the same amount of my student loans and made my mom the beneficiary. If I die, she would get my life insurance money, and would be able to pay off all the student loans. For a measly $22/month, I was able to get this piece of mind. It’s worth it.
First, what is life insurance?
Life insurance is a lump sum of money paid upon someone’s death to a designated beneficiary. In order to get this life insurance, the insured person pays a premium (pays money) to a life insurance company; this money is typically paid monthly, or sometimes yearly. A life insurance policy is the contract between a person (the insured person) and a life insurance company and states the terms of the agreement. The contract includes the amount of the lump-sum payment, the amount of the monthly premium, the beneficiary (the person who gets the money upon the insured person’s death), the contract length, etc.
In my case, I was able to get a life insurance policy with my employer (I work for a very large company). I paid $11 every paycheck (I get paid bi-weekly, so I paid $11*26=$286 every year) to get a life insurance policy of $140,000 to be paid upon my death. I made my co-signer/co-borrower, my mom, the beneficiary. With this money, she would be able to pay off all of my student loans, and have some money left over.
What is a co-signer?
A co-signer is someone who signs a loan with someone else (so there are two signatures on the loan) and is also legally responsible for repaying the loan (both parties who sign the loan are responsible). Loan companies typically require a co-signer if the person who needs the money does not have a good (or any) income or credit history. This is typically the case for an 18-year old!
In my case, I did not have a regular income (I only ever had summer jobs as a high-schooler) and I did not have a long credit history. The loan company would not allow me to borrow tens of thousands of dollars without having someone co-sign the loan (in other words, they wanted someone with more money and credit history to agree to pay the loan if I couldn’t). My mom co-signed the loans each year. If I died, or did not pay the loans, my mom would be required to pay them.
The situation where you NEED life insurance if you have student loans
If you have a private student loan, with a co-signer, and it’s a large amount of debt (I define large as: the co-signer would have difficulty paying off the debt immediately), then you need to purchase life insurance and make the co-signer the beneficiary. Private student loans still need to be repaid upon the student’s death. In many cases, the loans need to be paid in full, shortly after death. This is a huge burden to the co-signer (typically a parent). The life insurance should be equal to or more than the student loan balance so that the loans can be paid immediately and funeral expenses can be covered.
If you are unsure if you have a co-signer on your student loans, review your loan documents or call your loan provider to find out.
The situation where you DON’T need life insurance if you have student loans
If you have federal student loans, your loans are forgiven upon your death and do not need to be repaid. These loans, which may be offered to you after you fill out the FAFSA application, do not have a co-signer.
If you have a parent’s PLUS loan, and you OR your parent (who obtained the loan) dies, the loans are forgiven and do not need to be repaid.
In these cases of federal student loans, proof of death is required before the loans are forgiven.
How do I get life insurance?
You may be able to get a life insurance policy from your work, bank, credit union, or a private insurance company (check out this list here).
Buying a life insurance policy if you have a large amount of private student loans with a co-signer is absolutely necessary. It is the responsible way to thank your co-signer for their help in getting you a loan that allowed you to get your degree. Protect them from financial ruin by getting a life insurance policy with the co-signer as the beneficiary.
Do you have life insurance because of your student loan debt?