Refinancing student loans? Don’t forget this next step
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Almost every day, I get some sort of ad in my Facebook feed urging me to refinance my student loans. I don’t know if it’s because I frequent personal finance sites and Facebook is tracking me or if it’s because I recently liked a page called "Oh god why did anyone let an 18-year-old decide to take on all of this debt this system makes no sense."
Startups like Earnest, SoFi, CommonBond, and Credible are offering student loan refinancing at low rates to people whose credit scores don’t necessarily reflect their ability to pay back their loans. Earnest, for example, takes into account where you went to school, what you majored in, your job title, and your employer when they decide your final rate. Refinancing your loans with a lower rate can save you thousands of dollars per year on interest charges, helping you pay off your loans faster or pay less per month.
Why does this matter? Besides the obvious answer – everyone loves paying less money – there’s the important fact that 43% of student loan borrowers are putting off having a family because they’re afraid they can’t afford it. Refinancing student loans helps make it easier for young couples in their late twenties and early thirties to afford buying a house, having kids, and paying their student loans.
So definitely go refinance your student loans if it makes sense to you, whether you want to start a family in two years or 10. But once you get your new lower rate, don’t forget the important next step: buying life insurance.
Did you have federal student loans before you refinanced? If so, here’s some bad news: you just lost a pretty crucial protection. Turns out, if you die, your federal student loans are completely discharged. That means no one – not your parents, not your spouse, nor any other survivor – will be responsible for paying them back on your behalf. Private student loans don’t have the same built-in protection.
Whether you’re refinancing federal student loans or private student loans, you are technically taking out a new private loan, which is not required by law to have these built-in protections.
What, exactly, will happen to private loan debt if you die can vary depending on the specifics of your situation, but here’s the general overview.
Typically, your lender will try to collect from your estate. This means that money or property in your estate that you intended to leave to your survivors can be given to a loan company to pay off your debts. Usually a court figures this all out, leading to a protracted period of financial uncertainty for your family. If you had a co-signer – which is common in the case of private loans for grad school – the entire debt will typically land on their shoulders. And if you don’t leave any money in your estate to take care of it – also common for young, recent grads – your co-signers can be left with a lot of debt to pay off.
Some of the new student loan refinancing startups, such as Earnest, will actually discharge your debt with them if you die or are permanently disabled. But this isn’t something you can expect from every student loan refinancing company or bank.
Luckily, there’s a really easy way to get around all of this trouble: an affordable term life insurance policy that covers your student loan debt if you die. Term life insurance covers you for a specific period of time – in this case, until your student loans are paid off – and gives your survivors a tax-free lump sum of money that they can use to pay off your debts. It’s a simple product for a simple need, and it can be incredibly affordable – around $15 a month for a healthy, non-smoker 30-year-old male to get $200,000 worth of coverage for 20 years. Life insurance gets more expensive as you get older, meaning that now is always the best time to buy, barring the invention of time travel.
Of course, life insurance can do way more than just cover your student loans. If you’re refinancing your student loans because you want to get your finances in order for buying a house and starting a family, now is the perfect time to buy life insurance to protect your entire financial plan.
When you’re young, you have a lot more debts and expenses than you do savings. But you also have grand plans for a lot more. You want to get married, buy a house, have some kids, send those kids off to college, and actually retire instead of working your fingers to the bone. These personal and financial goals take work, but more importantly, they take time. You don’t pay a mortgage off overnight, no matter how hard you work.
The biggest risk to any plan that relies on time is, of course, that you’ll run out of it. Dying unexpectedly isn’t only devastating emotionally, but financially as well. Life insurance serves as a Plan B, a backup plan that automatically completes your financial goals in the event that you can’t.
I know, I know: it seems like a lot to think about, especially considering you came into this with the idea that you were just going to get a good deal on student loan rates and call it a day. But there’s no better time to buy life insurance – not only do you most likely need to protect your family from owing money if you die unexpectedly, but it’ll never be cheaper than it is right now.
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