Did you know you can insure your student loans against default? That’s right, there are various insurance products that you can purchase that will make your loan payments and/or pay off your loan in case you are injured, deceased, or disabled. As we discussed in a previous blog post, student loans are in flux right now with payments temporarily suspended and proposed loan forgiveness in play but it is still important to have contingency plans in place for your loans in case you are unable to make the payments.
Bankruptcy Law Matters
This is very important because under federal bankruptcy law, unlike other debt such as credit card, medical, and car loans, student loans generally can’t be eliminated in a bankruptcy so they will follow you around for the rest of your life (unless you pay them off first!). So if you become disabled due to an accident or injury and you can’t make your student loan payments, the loan provider can put your loan in default and send it to a collections agency that will harass you for payment, in addition to damaging your credit report. Dealing with a student loan in default is the last thing you want to deal with if you become disabled. It is possible to get federal student loan debt discharged in bankruptcy due to a permanent disability, but that is a difficult process and even if you are successful the discharged loan will be considered taxable income and the government will send you a nice tax bill on the loan amount.
Disability Insurance
Disability insurance is insurance that will pay benefits to you if you become temporarily or permanently disabled, and will continue to make your student loan payments while you are unable to work to generate income and make your student loan payments. This can be purchased as a rider on your existing disability insurance plan and is usually fairly cheap. Talk to your existing insurance provider about adding this rider to your policy.
Student Loan Life Insurance
This is definitely not the most fun conversation and you probably won’t be the life of the party if this is your opener, but an important financial product to have as you get older is student loan life insurance. There are generally 2 types of life insurance: term and whole. Term is a simple product where you buy an insurance benefit of $1 million for example and the policy expires after a 20 or 30 year term. Whole life insurance is more complicated and expensive, and for the purposes of this article we are going to stick to term life insurance. You should have term life insurance that will pay a benefit in the event of your untimely death, and this benefit can be used to pay off your student loan debt. It’s important to note that in the event of your unexpected death, federal student loans will be discharged so if you only have federal loans then you don’t need term life insurance. If you have private loans, then you should look into term life insurance because if something happens to you then the loan provider will look to recoup the loan amount from your estate and / or your parents if they co-signed for your loan.