Americans owe nearly $1.48 trillion in student loan debt. The average class of 2017 graduated with $39,400 in student loan debt which is a six percent increase from last year. As a new college graduate, life insurance may be the last thing on your mind, but perhaps it shouldn’t be. What would happen to all of your student loan debt money owed if you were to die prematurely?
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Death and Student Loan Debt
If you took out federally-backed student loans, such as a Stafford Subsidized Loan, they will typically be cleared upon death pending your family provides a death certificate. However, an important note in regards to certain federally-backed loans such as Direct PLUS Loans for parents is that while the loans will be discharged if their child dies, the amount that was discharged will be treated as taxable income and the parents may be hit with a large tax bill.
Privately-backed student loans are not treated the same as federally-backed student loans when it comes to the death of a borrower. Private student loans, such as those from Sallie Mae or Wells Fargo, for example, often require cosigners. Whether the borrower or cosigner of the loan dies, that death can trigger default causing the entire balance of the loan to be due immediately.
As a new college graduate, life insurance may be the last thing on your mind, but perhaps it shouldn’t be.
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If you acquired student loan debt while married, upon your death your spouse may be responsible to pay your student loans in full if you live in a community-property state. Laws aren’t uniform across all community-property states however. Many community property states offer exceptions for education debts so that the spouse isn’t held liable for the debt unless they cosigned the loan. Each state has different laws when it comes to joint debt, find out the laws in your particular state.
Life Insurance and Student Loan Debt
Even if you do not have dependents, it is a good idea to look into buying life insurance if you have student loan debt or cosigned on a student loan. Term life insurance is a great, affordable option for protecting yourself and the person who helped you by cosigning.
According to U.S. News and World Report, it takes the average bachelor’s degree holder 21 years to pay off student loans. Term life insurance can be customized to cover the amount owed and can last up to 30 years depending on the term length you choose.
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College graduates of a four-year degree are typically about 22 years of age. The average cost of a 20-year $100,000 term life insurance policy for a healthy 22-year-old is less than $10 per month. If you plan on having a family, you have a couple options when it comes to owning more life insurance coverage.
Option 1: You could start out with more coverage right away if you want to start a family sooner rather than later. A 30-year policy with $500,000 in coverage would be approximately $32 per month for that healthy 22-year-old.
Option 2: You could work with your agent to add more coverage down the road. Depending on how long ago your existing life insurance coverage was approved, you may or may not have to go through underwriting again.
Option 3: You could layer a second term policy on top of your current one. If you only purchased a $100,000 policy previously but realized with a family to support you need more coverage, you can apply for a second insurance policy. For more information on layering life insurance policies, see our blog post Purchasing Multiple Life Insurance Policies.
Option 4: You can later convert your term policy into a permanent one if you decide you would like lifelong coverage.
Quotacy makes getting life insurance easy for you, the modern consumer. You can apply for term insurance right online and when it comes to the medical exam, the examiner will come right to your home at a time that works for you.
We keep you updated at every step so you’re never out of the loop. Whether you want to work with us via phone, e-mail, or text, we accommodate your preferred means of communication whenever possible.
Image credit to: Faustin Tuyambaze
About the writer
Natasha Cornelius
Writer, Editor, and Co-host of Quotacy's Q&A Fridays
Natasha is the content manager and editor for Quotacy. She has been in the life insurance industry since 2010 and has been making life insurance easier to understand with her writing since 2014. When not at work, she's probably studying and working toward her Chartered Life Underwriter (CLU) designation while throwing a tennis ball for her pitbull mix, Emmett, or curled up on her couch watching Netflix. If it’s football season, the Packers game will be on. Connect with her on LinkedIn.
… or you can send your kid to college in Europe or Canada for free or a tiny sliver of the price. I started researching this when my kids university wanted 44,000 bucks for a semester in London. So, I check to see how much it would be if we just signed up ourselves at the same university, and she took the same exact classes… 3,000. Yup, 41,000 less for one semester. I wish I learned this 100,000 bucks ago when I made the mistake of sending my first kid to an American University. The loan is in my name only. I would never pay extra for a life insurance policy, they get what they get.
Hi Kat, thank you for your comment about the expense of university. Unfortunately I don’t have the expertise to discuss strategies for lowering international tuition for college students, although what you mention sounds interesting.
When it comes to buying life insurance to cover student loans, you are correct in that it is not a necessity. Sometimes student loans are forgiven upon death, but sometimes they are not. It is important to read through the contract to understand the details of your loan. There are many circumstances where young married couples both have student loans that are already crippling their finances, and the loss of either one of them will bankrupt the other. So not only do they lose the love of their life, they lose everything they have worked for up to that point. Life insurance is an important product for these families.
Parents also are co-signers on loans for children, and if that loan rolls up to the parents, they may or may not have the ability to pay it off. This can devastate the parent’s retirement. Parents are not supposed to bury their children and life insurance is meant to mitigate the financial stress if their child has student loans that the parents are ultimately responsible for.
I have a friend who lost her only child about a decade ago. This was the most traumatic moment in her life, and still continues to be to this day. The pain and suffering of losing a child is something no one should ever have to go through. Life insurance is only a financial solution for that kind of tragic loss. But without it, a family may continue to suffer for years onwards in a financial capacity on top of the emotional and spiritual loss.