Do you have some student loans that you’re trying to pay off right now? It can be tough to pay them back, especially if you’re struggling to get a job with your newly achieved education. Still, most people know how to pay off student loans. They make the monthly payments and try to pay extra, which goes to the principle.
However, many other people wonder what might happen if the person who got the student loan passed away before the loan was repaid. The shocking truth is that the co-signer or someone else might be responsible for paying back the loan. Therefore, life insurance could be highly beneficial for your student.
There are many factors to consider here, and we are going to go over each one for you.
Loans with Death Forgiveness
The first thing you need to know is what type of loan you have. Is it going to be forgiven if you pass away and haven’t paid it off?
To answer that question, you need to know if you have a private or federal loan. Federal student loans are always forgiven at death through the Total Death and Disability Discharge.
That’s the good news because many people focus on federal loans to get them through college. They often have lower interest rates and don’t require repayment until you’re out of school.
However, if you have private student loans, they aren’t covered by the TDDD. If you pass away before those loans are paid off, the co-signer is responsible. Often, students have to have a co-signer, such as a parent, aunt, or grandparent, because they have not established a good enough credit history to qualify alone. Therefore, that person is responsible for the debt if you die.
Co-signers and Life Insurance
A co-signer is someone who also signs the loan with you, meaning there are two signatures. They are legally responsible for repayment if you default (even because of death). Often, the co-signer is someone who has a steady income and a good credit history.
Now, if you have a co-signer on the loan, you may want to take out a life insurance policy on yourself. How do you pay off student loans after you die? Your co-signer is responsible. With a life insurance policy, it covers your debts (including student loans) if you pass away. Still, it is a good idea to make sure that the co-signer is a beneficiary on your policy. Plus, you don’t need to have an extensive one in place. It just has to be enough to cover your loan obligation. Often, young people can find inexpensive options because of their age and good health.
While a co-signer is often a parent, it could be a spouse. You and your spouse may choose to refinance a loan with the spouse as the co-signer. Alone, you might not be able to refinance or take on the current debt, but you can with someone else also being legally responsible.
In a situation like this, the lower-earning spouse should have a life insurance policy to protect the other person.
Community Property States
Those who don’t have co-signers don’t have to worry about how to pay off student loans after they die because the obligation isn’t going to pass to someone else. However, if you are married and live in a community property state, your spouse might be held responsible for repayment, even if they weren’t a co-signer.
Nine states are considered community property states, including California, Louisiana, Arizona, Idaho, New Mexico, Washington, Nevada, Wisconsin, and Texas. Alaska also has an opt-in community property law, so if both parties agreed, their property is considered to be community property.
If you happen to live in one of those states, you should look at your loan terms because the lender could possibly come after your estate. This is highly unusual, but you should still be aware of what the lender can legally do.
While it sounds a little morbid, some lenders do offer student loan death forgiveness. It is a good idea to see if that is an option on your loan. That means if you live in a community property state or have a co-signer, you might not need the life insurance policy. The lender is going to forgive your debt if you pass away, which means it doesn’t move to someone else.
However, some lenders haven’t caught up with the times yet. If your debts aren’t covered by death forgiveness, a life insurance policy might still be needed and could be a smart move. Otherwise, an alternative is to refinance your student loans with another lender that can offer death forgiveness.
What Is Life Insurance Anyway?
Life insurance is a sum of money that is paid upon your death to a beneficiary of your choosing. To get the life insurance, you have to pay a premium, usually monthly, to the company. It’s a contract between you and the company and provides you with the terms of the agreement. You should know the lump-sum amount the beneficiary is going to receive, your monthly premiums, and who your beneficiaries are.
You can find life insurance policies that are primarily there for student loan forgiveness upon death. These are often less expensive than traditional policies, and you can cancel it once your loans are paid off.
How to Choose Life Insurance for Student Loans
You’ve probably wondered how to pay off student loans yourself. In this case, life insurance isn’t going to help you and is another bill that you must pay each month. You can consolidate your loans through refinancing and other means.
If you are worried that you could die in a freak accident and leave your co-signer to pay the rest of your loan off, it is a good idea to get life insurance. Still, there are a variety of companies out there, as well as policies. How do you know which one is best?
The first step is to find out where to buy life insurance. You can often do this from your bank or credit union. There are also many private insurance companies out there. Of course, you are going to have to research your options thoroughly to ensure that you pick the right company with the best deals and the proper coverage.
You need to know your coverage needs and how much money you are going to need to cover that loan. Often, students prefer to go a little over their loan amount. That way, the policy can cover funeral costs and may even give your parents a little extra to help them get by.
Make sure that you know the loan balance, as well as the interest that is going to accrue. You should also know how long it could take to pay off the loan entirely.
Generally, private loans have a variable interest rate, so you should factor that into the equation. For example, the overall interest rate for a private student loan is about 7.99%. With a $13,600 loan and a ten year term length, you are going to pay almost $19,800 with interest.
The policy should cover your full loan plus interest amount. Make sure it lasts as long as you are going to have the loan.
You can find two types of life insurance, including term and whole life. Whole life insurance is permanent with cash value that doesn’t expire. However, it costs up to ten times as much as a term life insurance policy.
Often, students need term life insurance. You buy a policy for a specific term. If you die during that time frame, your beneficiary receives your death benefit. They can use the money for whatever they want, but the ultimate goal here is to pay off your student loan and possibly your funeral expenses.
Term life is often the right option for many people, and it is what you want to cover student loan debts.
There are other things to consider here, as well.
- Is the life insurance company a match for your health? Carriers might offer better rates for people with few if any health issues. Still, some companies are going to focus on particular conditions more. For example, one company might be more favorable if you have a history of diabetes or depression.
- What policies are offered? You know you need term life insurance, but most policies have other features you may want to consider. These can include a return of the premium or an accelerated death benefit.
- Is it available online? Shockingly, many insurance companies still do everything by fax machine and snail-mail. If you do most of your banking and payments online, it’s good to have an insurance company that’s up with the times.
- Does it come highly rated? You should be aware that life insurance companies are rated and regulated. Make sure yours is financially stable and has been rated high by consumer protection and financial agencies.
Many people wonder how to pay off student loans. However, they focus on the monthly payments and rarely think about dying. Of course, you are young, so you aren’t worried about heart attacks, diabetic complications, and other things that usually happen to older adults. Still, accidents happen, and issues can arise. Therefore, term life insurance may be your best bet, as it can absolve your loved one from having to pay back the loan.