NEW YORK, July 29 2022 (GLOBE NEWSWIRE) — With student debt in the United States currently estimated at $1.762 trillion, the price of higher education is rapidly weighing on many households. Borrowers may wonder if they should consider their student loans when purchasing life insurance. The answer to this question depends on the type of loan the borrower has and who signed it.
Who is responsible for paying the debt?
Many people believe that student loan debt is forgiven if the borrower dies. However, this is not always the case. It depends on a few factors, including whether the loan was federal or private, and whether the borrower had a co-signer.
Federal vs Private Student Loan Debt
Federal student loans (without a co-signer) are the simplest case. By law, these loans are canceled in the event of death or total disability, and family members or the estate are not responsible for repaying them. In this case, neither party needs to increase their life insurance coverage based on the loan.
On the other hand, private student loans may have different terms. Because private loans are issued by a private lender, the lender can dictate their own rules, including death or disability conditions. The best way to know for sure is to read the fine print.
If someone with unpaid private student loans and no co-signers were to die, their estate may have to repay the debt. A judge can order the sale of assets that the borrower was planning to leave to others (like a house or a car) to repay the lender. In this situation, having an adequate amount of life insurance would help eliminate this burden and leave these items to their original heirs.
Co-signing occurs when a parent or other adult agrees to be responsible for the loan should the borrower default. Co-signing is common for many types of loans, including student loans.
For some federal loans, a co-signer must continue to make payments even if the borrower dies. It depends on the type of federal loan.
For private loans, the co-signer may need to continue making payments. The loan agreement may also include an acceleration clause. This could mean that the lender can make the loan balance due immediately if the borrower dies.
Spouses of borrowers
Like co-signers, spouses may also be required to make payments after the death of the borrower. Much will depend on:
- The state where the loan was taken out.
- If the couple was married at the time of the loan.
In some states, loans are considered shared or community property. Even if the surviving spouse has not co-signed, places where community property laws will require them to continue making payments. This is another example of where having life insurance — and, therefore, a death benefit — can help ease that burden.
How to Use Insurance to Protect Against Student Loan Debt
A borrower’s decision to purchase life insurance or obtain additional coverage to potentially pay off student debt depends on whether they had a co-signer, the type of loan, and the status in which he lives. Borrowers and co-signers should carefully review their loan terms and decide if they need additional life insurance coverage.
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