Consumer Watchdog: Got a Co-Signed Loan? Get Life Insurance

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Updated on Wednesday, July 1, 2015

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Understandably, many parents want to look after their adult children by helping them pay for college. Some parents will have money squirreled away in savings. Others may get a Parent PLUS loan. But when that isn’t enough, some will co-sign on student loans with their children. The loan will technically be in the child’s name, but the parent works as backstop. If the child can’t repay the loan and defaults, the lender will be coming to collect from mom and dad.

There is one other nasty catch when a parent co-signs on a private loan: should a child decease during the repayment of the loan, the parents are still obligated to pay down the debt.

The news has been littered with tragic stories of parents reeling from the shock of losing a child and then being smacked over the head with a bill for tens-of-thousands of dollars in student loans.

This is why it’s important for any student or graduate with a co-signed student loan (or any loan) to also have life insurance.

The Need for Life Insurance

You don’t need a massive life insurance policy, just enough to cover the loan (and don’t forget to account for any interest). This will protect your parents in the event you pass away and the loan becomes their responsibility.

However, this will not be the case with most federal student loans. Federal loans are automatically discharged in the case of death.

Some companies offer life insurance to employees or you can see if your auto-policy offers a discount to bundle in life insurance. It’s important to shop around and find your best deal. You should also prioritize term life insurance over whole life insurance (no matter how good the sales pitch for whole life sounds). You can also cancel your policy or change it as you hit different life milestones like getting married or having children.

But it isn’t just the student who needs the life insurance policy.

Auto-Default

Co-signers may need life insurance (or at least enough saved to cover the loan) as well. A 2014 report by the Consumer Financial Protection Bureau found that auto-defaults were a significant reason for complaints filed against private lenders.

An auto-default occurs when a co-signer dies or declares bankruptcy. Even if the student has been diligently paying bills on time for years, the change with the co-signer can cause the loan to default and be due immediately.

In some cases, these automatic defaults can also be reported to credit bureaus and wreck the student’s credit.

Everyone Needs to Be Protected

Given the major ramifications for both a co-signer and a student, it’s best if anyone with his or her name on co-signed student loan has a life insurance policy. This will serve to protect both the borrower and the co-signer in the event someone passes away (or declares bankruptcy) during the repayment of the loan.

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