Have You Cosigned Student Loans?
If amassing the largest quantity of college debt is a contest, it appears that the Class of 2014 has won. According to one analysis of government data, the average graduating college student this year had $33,000 in student loans. After adjusting for inflation, that’s nearly twice the amount students borrowed two decades ago. And parents who cosigned loans for their children may be on the hook for it.
Not all students are eligible for federal financial aid in the form of subsidized college loans. Some have to turn to private loans for all—or at least a portion—of their tuition and fees. With a cosigner, these young people increase their chance of approval, and parents are often the first choice.
Unfortunately, it’s not as simple as providing a reference. When you cosign a student loan, you basically put yourself on the hook in the case of a default. Debt collectors will call you if your son or daughter misses a payment. Your credit will suffer. And if—heaven forbid—your child dies, you’ll find yourself responsible for the entire amount. It is often impossible to have private student loan debt discharged in bankruptcy.
Back in August, CNN Money reported the story of one couple who lost their daughter and face paying back the $100,000 in private student loans they had cosigned. Their credit is ruined, and they continue to struggle with the additional burden of debts that have ballooned to $200,000 due to interest and late fees. If they had a life insurance policy on their child, the story might have had a happier ending. One equal to the student loan balance, with the parents as beneficiaries, would have cost as little as $150 a year—a small price to pay for protection from financial devastation.
If you’re cosigning or have already cosigned private student loans for your child, you can avoid making this all too common mistake. Consider these tips for taking out a life insurance policy on your college-age child.
- First, check with the lender. Some larger private lenders—from Sallie Mae to Wells Fargo—have begun providing debt relief when a primary borrower dies. If that is the case with your child’s student loans, life insurance may be unnecessary.
- If the lender does not offer such protection, talk to your financial advisor about the best possible life insurance plan. He or she can explain the differences between policies and help you find adequate coverage at a price you can afford.
- In many cases, a term life insurance policy (in which you can choose the length of coverage) may be best. You’ll want a term that is long enough to cover you throughout your child’s repayment of the loans.
- The coverage you purchase should be equal to the balance on the loans. If your child has not finished school, your financial advisor can help you estimate the final cost of his or her education.