Should I Have Life Insurance to Cover Student Loans? (Maybe, Maybe Not.)

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It’s all too common for parents and children to take out student loans without fully considering what will happen to them if the student dies before they’re paid off.

Though there’s a common belief the loans will be forgiven in this scenario; that’s unfortunately not always the case.

In fact, the opposite is often true.

The parents are still on the hook for the loans, or, at least, the taxes associated with them.

That’s why it’s so important to consider buying life insurance to cover student loans, especially if the bulk of your loans are private.

(There’s also one other pretty important one, but we’ll get there; keep reading).

Below we look at the relationship between life insurance and student loans in more detail, including how to find the best life insurance for you.

Federal Loans vs Private Loans

how life insurance can cover student loans

The two main types of student loans are federal loans and private loans.

Federal loans include:

  • subsidized loans
  • unsubsidized loans
  • PLUS loans
  • Perkins loans

These are often issued by the college or university the student is attending.

One big benefit of federal loans it they are usually forgiven if the student dies.

The exception is with PLUS loans. The parents are still on the hook in this situation.

However, if the parents also die, then the loans are forgiven.

Private loans are the opposite!

They are almost never forgiven if the student dies (although each lender has the option to forgive them). Parents will be on the hook to pay them off if their child passes away unexpectedly.

That’s why students with a large amount of private loans should strongly consider life insurance coverage.

This is especially true of students whose parents co-signed their private loans (which is almost always the case).

DID YOU KNOW: If you are one of the thousands who choose to refinance student loans to save on the government’s interest rates, you no longer have the protection of having your loans forgiven upon death! Once you refinance, the previous loans are closed, and you now have an entirely new loan! Keep this in mind.

Life insurance which provides enough coverage to continue paying off the loans in the event of the student’s unexpected death will ensure the parents don’t face sudden financial hardship in addition to the loss of a child.

Why You Should Consider A Life Insurance Policy

As mentioned above, the number one reason to buy life insurance to cover your student loans is to ensure no one else is put on the hook for them if you die unexpectedly.

Usually, this is your parents.

Chances are they co-signed on the loans. This means they’ll be required to pay off any unpaid student loan debt.

However, this same idea also extends to your spouse.

If you get married and then die before paying off your student loan debt, your spouse might be on the hook for the rest of the payments in certain states.

This is especially the case if you refinanced or consolidated your loans into a new one!

Buy life insurance to prevent this from happening.

The benefit can be used to pay off the student loan debt to ensure your spouse doesn’t suffer financial hardship in accruing the student loan debts.

Of course, life insurance is beneficial in numerous other ways if you have a spouse (and children).

Not only will the benefit be used to pay off your student loan debt, but it can also help provide financial stability for your family in a very trying time.

What We Recommend You Should Do

You shouldn’t let the fact student loans are often not forgiven deter you or your child from attending college, of course.

There’s a lot you can do to ensure student loans don’t cause too much trouble in the event your young student dies early.

The first thing you can do is take out the right loans.

It’s always best to look for loans which do offer forgiveness in the event the student dies.

As mentioned above, most federal loans do offer forgiveness while private loans don’t.

This means it can be a wise idea to start investigating and researching student loans from the federal government first.

However, even federal student loans might come with problems.

It also means taking a second thought before refinance or consolidating loans; while you might save a lot on your monthly payment, consider throwing some of that savings into a small term life insurance policy to make sure your parents or spouse don’t take on the burden.

Though the loan itself might be forgiven if the student dies, the parents might still be obligated to pay taxes related to the loan.

In addition to selecting the right student loans, you should also take time to plan ahead. Part of this is considering whether or not life insurance makes sense to you and your family.

Your Responsibilities As A Parent

Taking out student loans is as much the parent’s decision as it is the student’s decision.

Though the student is required to pay them off, most loans, especially private loans, require a co-signer in the form of the parent. You’ll have noticed this if you read any disclaimers when filing the FAFSA, for example.

This means if the student is unable to pay the loans (such as in the event of death), the parent is required to pay them back.

That’s why it’s so important for the parents to also be aware of the benefits of life insurance to cover student loans.

Even if your child doesn’t think life insurance is needed, it might be wise for you to buy it anyway.

Though the best option is for your child to buy the life insurance policy themselves, it’s sometimes possible for you to buy the policy on them.

In this scenario, the policy still covers your child, but you as the parent take care of making the regular payments.

If your child dies unexpectedly, the benefit from the policy goes to taking care of their student loan debt as well as any other end-of-life expenses.

Buy Term Life for Student Loans (Nothing else!)

There is a huge variety of life insurance companies currently in business.

And each of these life insurance companies offers different policies. These range from term life to whole life and much more.

If you’re ONLY buying coverage to pay for student loans, buy term!

It’s essential to understand the differences between these policy types, as well as the different providers, before making a decision.

Some will be better suited to student loan debt than others. However, the most important factors are your personal needs and preferences. You must decide exactly why you need life insurance before buying it.

The right plan for you will be much different if you only want it to cover your student loans versus if you also want it to provide for your spouse and children.

Simply put, there is a life insurance plan out there that’s right for everyone, and you want to make sure that you do buy the right now.

Final Thoughts

Our life insurance company reviews can help you dissect the pros and cons of the top life insurance companies in the United States.

They’ll help you narrow down your search to only the best life insurance providers for your specific needs and preferences, including to help cover your student loans.

Even if you ultimately decide a life insurance plan isn’t necessary for your student loans, we encourage you to at least look into the option, especially since some life insurance plans are extremely affordable.

The benefits of life insurance extend well beyond covering student loans, although that benefit should certainly not be discounted.

Author:

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Jason Fisher

Jason Fisher is the founder and CEO of BestLifeRates.org, LLC. and a multi-state licensed life insurance agent who has helped over a million Americans seek out affordable coverage, compare quotes, or get their family and businesses covered.

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