By: Reyna Gobel
According to an 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, over 90% of undergraduate private student loans have cosigners. These signatories — most often the student’s parents — are jointly responsible for paying back those debts and buying life insurance for their college kids.
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. Student loan borrowers don’t always 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 should purchase term life insurance for both the student and yourself. 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 discharge upon the death of the borrower. If your child borrows from the Department of Education, you can often skip buying them a policy. There’s one exception here: Federal Parent PLUS loans discharge after the death of you or your child, but it’s treated as taxable income. If you fear a big tax bill, consider 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 4 times 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 student borrow. It should last as long as the repayment period. Private student loans typically come in 5 -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 buy a small amount of coverage. While the market changes, policies under $50,000 aren’t commonplace. Talk to a broker or agent directly to get quotes.
5. Show proof of insurable interest.
You can buy a life insurance policy for someone else if you 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 joyful. Include it as part of an overall financial chat. For instance, talk about the importance of good credit, building an emergency fund, creating a budget, AND buying life insurance.
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. The balance becomes due immediately after the death of you or your student. If your loan contains this 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, Policygenius’ senior editor of personal finance and then edited by our editor, Reyna Gobel. 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.