Student loan cosigner? Buy your kid life insurance
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Updated March 9, 2018: Lisa Mason took out over $100,000 in private student loans in order to get through nursing school. Her parents, Steve and Darnelle Mason, cosigned the loans. When Lisa died from liver disease at the age of 27, Steve and Darnelle took in her three children - and her student loan debt. Because of missed payments, the debt soon ballooned to $200,000.
Parents and other relatives cosign private student loans all the time. According to the Consumer Financial Protection Bureau, over 90% of private student loans had a cosigner. If the borrower dies, it’s up to the cosigner to continue payments. In the case of student loans, those payments can be astronomical. A life insurance policy for your child can protect you from financial ruin by providing enough cash to pay off the debt in a lump sum. In the guide below, we’ll walk you through the process of getting an inexpensive life insurance policy for your child.
There are a few different types of student loans, and not all of them require that a borrower’s survivors pay off remaining debt.
Federal student loans are automatically discharged after the borrower’s death.
If the student has private student loans, the lenders can use money from the deceased’s estate to pay off the debt. Assuming the borrower doesn’t have a large estate, there won’t be much for the lenders to pull from and the loans will be discharged.
Here’s where it gets tricky: the vast majority of private student loans have been cosigned by a parent, grandparent, or other adult. If the borrower dies, the student loan cosigner will still be responsible for paying off the remaining balance. Private student loans don’t have the same kind of consumer protection clauses that federal loans have, so while a cosigner may be able to work out a deal with a lender, lenders are under no obligation to reduce the balance or help you make payments.
The takeaway? If you’ve cosigned any of your child’s private student loans, you should get a life insurance policy to cover the balance.
We generally suggest a term life insurance policy. Term life insurance policies last for a specific amount of time (referred to as the "term"). Common terms are 10, 20 and 30 years long. This makes a lot of sense for student loans, since the loans are supposed to be paid off within a certain period of time.
The alternative, whole life insurance, is a complex and expensive product. It’s a hybrid between insurance and investment portfolio that really only makes sense for the wealthiest people as part of a larger, comprehensive financial plan.
You can learn more about the difference between term vs. whole life insurance here.
Since you know what kind of life insurance policy you want to get, there’s only two big variables: the length of the term and how much it needs to cover.
The answers to both of those variables will come from your child’s loans. The life insurance policy you buy should cover all of your child’s private student loans that you have cosigned. That number will be different for everybody — it could be as low as $10,000 or as high as $100,000.
The length of the term should roughly match how much time it will take your child to repay the loan. If your child has eight years left on the repayment plan, for example, the policy’s term should be as close to eight years as possible. If you can’t get the term to match the repayment plan exactly, err on the side of making the term longer. This will guarantee that the entire length of the repayment period is covered.
You won’t know for sure until you run a quote and go through the underwriting process, but we can give you a general idea. (We can help you easily compare life insurance quotes across companies here.)
We ran two quotes based on two graduates right out of college.*
The first, "Liam," is 22 years old and has $29,400 of student loan debt. $5,880 of that is from private student loans that his parents cosigned for. Liam eventually wants to be a Hollywood actor, but for now he’s bussing tables. With his limited salary, it will take him a while to pay off his loans. We wanted to choose a policy that reflected how long it would take him to pay them off at his current salary level.
We were able to find him a policy with $25,000 worth of coverage for 20 years for only $8.36/month in premiums. The total cost of this policy is just over $2,000.
The second, "Madison," is 25 years old and has debt from her ungrad and graduate careers. She has $57,600 of student loan debt, with $11,520 of it from private student loans that her parents cosigned for. Madison just got an entry-level job at a marketing firm. She’s trying to pay off her student loans as soon as possible, and plans to have them completely paid off within ten years. We chose a policy that reflected that goal.
We were able to find her a policy with $25,000 worth of coverage for 10 years for only $8.16/month in premiums. The total cost of this policy is just under $1,000.
*How did we come up with these numbers? Each graduate above has the average amount of student loan debt held by students when they graduate. The average student loan debt for undergrads was found by Project on Student Debt for the class of 2012. Project on Student Debt also found that approximately 20% of student loan debt came from private loans, which is how we calculated that number. Our average loan debt for graduate students came from the New American Education Policy Program and is based on the class of 2012.
Parents are allowed to take life insurance policies out on their children, but your child will have to comply with a phone interview and the medical exam. Both of these are part of the application and underwriting process and will determine the final price of your policy.
You can learn more about how to buy life insurance here.
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