Hey everyone! As you know, I recently partnered up with Penn Mutual Life Insurance to create an educational post series about life insurance! If you have high amounts of student loan debt and are wondering what happens to loans when if you were to die – this is a GREAT post for you. Enjoy this killer post by Teresa Howard! ~M$M
Student loan debt is crazy high. Every second, America’s student loan debt grows by another $2,726. It has exceeded the amount of total credit card debt in the U.S., and, depending on the information you look at, student loan debt now falls as the second highest source of personal debt, right behind mortgage debt. That’s a daunting mountain of debt for many recent graduates. Student loan debt, combined with the high unemployment of a few years ago and the low starting salaries for recent college graduates, makes it challenging for those starting out in their financial lives. It feels impossible to pay down student loans, save for retirement, save for a house, and live on a budget.
But there is one potential “gotcha” with student loan debt that many millennials are ignoring. What happens to that debt if you die or become disabled? Are you going to saddle your parents, grandparents, or your spouse with paying down your student loans?
There is this perception that student loan debt is completely absolved or forgiven upon death. Maybe so, but maybe not. Every student loan is different, and it pays to understand the details of your individual student loan. For example, while 95 percent of all student loans are Federal loans, and Federal loans are generally forgiven upon death, there are circumstances where they are not forgiven.
Here are a few tell-tale signs of “gotcha” student loan debt that might survive your death:
- If someone had to co-sign the loan with you. Your co-signer is going to be responsible for the debt of the student loan if something were to happen to you.
- If you have a private loan. Federal loans don’t cover everything, so many people turn to private loans to help pay college expenses. These loans often require a co-signer.
- If you were married when you applied for the loan. If you file jointly, then your spouse could be responsible for the student loan. While most college students are single, it’s not uncommon for graduate students to be married, with children.
- If you are married and live in a “community property” state. If you live in a community property state, your spouse could be responsible for all or portions of your student loan if the loan was applied for while you were married.
- You consolidated your loans. While loan consolidation can lower your interest rate and your payments substantially, it may involve a change in loan terms. Again, every loan is different, so read the terms of your loan carefully.
It’s important also to think not only if you were to die but also what if you were to become disabled as well too. You are much more likely to become disabled during your working life than you are to die. If you were no longer able to earn your current salary, how would you pay down your loans? The goal here is to plan ahead so that you and your loved ones don’t get plunged into a financial crisis.
All these potential problems are what insurance was invented for. Life insurance can protect your loved ones if you die, and disability insurance can protect your income if you become unable to work. You may have some of both of these as a benefit from your employer, but many people find it worthwhile to supplement with their own policies, especially since you are likely to change employers several times over the course of your career.
Life insurance comes in several different flavors. Term insurance is an inexpensive way to get protection for your family needs. Most term insurance provides coverage for a set amount of time, usually 10, 15 or 20 years, and the premium remains the same throughout the life of the policy. The downside of term insurance is that it is only temporary. You have no equity in the policies, and when they end you may be without coverage.
Permanent insurance, also known as whole life, has no expiration date. It also builds cash value, which can be accessed throughout your life for any purpose – college for children, starting a business, or saving for retirement. Millennials have one big advantage in their favor when it comes to permanent insurance: Time. Because of the power of compound interest, the sooner that you start saving, the better for your financial future. In some cases, the cash value of your policy could accumulate tax free.
It’s also important to consider disability insurance to replace your income if you were to become permanently disabled.
Millennials have a tendency to think they’ve got plenty of time to think about things like insurance. However, even if you aren’t married and don’t have much in the way of assets, most already have responsibilities, be that student loans or the care you may one day need to provide to your aging parents and grandparents. It’s important to establish yourself as an individual, come up with a strong financial strategy and get started early on implementing it.
Teresa Howard is a financial advisor at Legacy Planning Partners, LLC, in Oklahoma City, Oklahoma.
The article is the author’s opinion and is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate. Descriptions of the policy features and options are only partial; for complete details and limitations ask to see a complete policy. Loans and withdrawals will decrease the cash value and death benefit. Insurance policies contain charges, limitations, exclusions, termination provisions and terms for keeping them in force. Contact your financial representative for costs and complete details.