According to a recent article by Policy Genius, “The cost of college has skyrocketed over the last decade, resulting in $1.4 trillion of outstanding student loan debt. But college grads aren’t the only ones on the hook for their balances.
Per student debt analytics firm MeasureOne, last school year, about 93% of undergraduate private student loans had a cosigner. These signatories — most often the student’s parents — are jointly responsible for paying back those debts and, thus, find themselves in an uncomfortable situation: They need to buy life insurance for their college kid.”
At College Parents of America, our goal is to help families support their children and overcome the risks surrounding the large investment higher education has become. To make the process a bit easier, here are seven tips inspired by Policy Genius for college parents looking for clarity on when life insurance is a good idea.
1. A college student with student loans doesn’t automatically need life insurance, however, if you have a private student loan you likely do.
If you co-sign a private student loan for your college student or a family member (think loans from banks or from Sallie Mae, Discover, College Ave), you likely will smart to purchase some term life insurance on both the student and yourself. It is critical to realize that co-signed private student loans, are not guaranteed by the government nor automatically discharged if a cosigner dies, that require parents to prepare for the worst.
Federal student loans are discharged upon the death of the borrower, so, if your child is borrowing from the Department of Education, you can often skip buying them a policy. There’s one exception here: federal Parent PLUS loans, which are discharged after the death of you or your child die, but treated as taxable income. If you fear a big tax bill, it’s worth considering a small policy.
2. Term life insurance is likely an affordable choice
There are two major types of life insurance. Whole life insurance doesn’t expire, but it costs 4x as much as term life insurance, which covers a person for a set period of time. Fortunately, term life is the way to go if you’re looking to cover student loan debt.
3. Use the loan’s rate & term to determine how much coverage to buy
The policy should cover the full amount of your child’s student loan plus interest, meaning you don’t want to go solely off the base amount you and your child are borrowing. It should also last as long as the repayment period. Private student loans typically come in five-to-15-year terms with annual percentage rates anywhere from 3% to 15%.
4. Expect to talk to a broker
Even though student loan interest adds up fast, you’re probably still looking at buying a small amount of coverage. While the market is changing, policies under $50,000 have yet to become commonplace, so you might need to talk to a broker or agent directly to get quotes.
5. You’ll need to show proof of insurable interest
You can buy a life insurance policy for someone else, but you need to demonstrate what’s known as “insurable interest”. That’s a fancy way of saying you would face financial hardship if the person passed away. A cosigned loan, whether related to college, housing or personal expenses, qualifies. You also need to involve your child in the process: They need to consent to the application process and sign the final policy.
6. Turn the purchase into a teachable moment
Talking to your teen about life insurance isn’t a conversation either of you really wants to have. But you can turn lemons into lemonade by using it as a springboard to other important financial lessons. For instance, you can take about the importance of good credit, building an emergency fund and creating a budget.
7. Read the loan’s terms carefully
Private student loans are known for some very fine print. For instance, some lenders stipulate a loan go into “automatic default” after the death of a cosigner. That means the balance would become due immediately after the death of you or your child. If your loan contains that clause, make sure your life insurance policy accounts for the debt. If not, consider upping your coverage.
You can find a full guide to buying life insurance for your college kid here.
The original article was created by Jeanine Skowronski is Policygenius’ senior editor of personal finance. She’s also a #CrankyXennial. Disclaimer: Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.