According to the Federal Reserve of St. Louis, total student loan debt in the United States has reached over $1.6 trillion. And there are now over 44.7 million student loan borrowers with an average student debt total of $29,900.
If you're one of the millions of people dealing with student loans, you may wonder what will happen to them in the unlikely event that you pass away before they're paid off. Will they be forgiven? Or is there a chance that your debt could be passed on to your surviving family members?
First, it's important to identify what kind of student loans you have. If your student loans are federal, you can rest easy. All federal student loans are forgiven at death by Total Death and Disability Discharge.
However, your private student loans are not covered by this program. So do you need life insurance to cover your private student loans? Once again, the answer will depend on your situation. Here are three questions that could help you decide.
1. Do you have a co-signer on your student loans?
When someone co-signs on a loan, they are taking equal responsibility for the debt. For this reason, your student loan debt could pass on to your co-signers after you're gone.
If your parents co-signed on your student loans, you may want to consider making them a beneficiary of a life insurance policy. The policy doesn't have to be large. It just needs to be big enough to cover your student loan obligations. And if you're young and healthy, a term life insurance policy can be very inexpensive.
Parents are the most common co-signers on student loans, but spouses can be co-signers as well.
"We have a lot of people who are refinancing or cosigning on a spouse's student loans," said Kayse Kress, a certified financial planner at Physician Wealth Services. "People have taken on debt but they don't work in the same capacity that they planned on. And they're not going to qualify for a refinance on their own. But they can if their spouse co-signs."
In situations like these, Kress said it may make sense to take out a life insurance policy on the lower-earning spouse in order to protect the co-signer. "Even if someone isn't the primary breadwinner, you may still want to take out a life insurance policy on that individual."
2. Do you live in a community property state?
If you don't have a co-signer on your student loans, that's great. In most cases, you don't need to worry about your student loan obligations passing on to anyone. However, if you live in a community property state, your spouse could be responsible for repaying your student debt - even if they didn't co-sign.
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Currently, there are nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska has an opt-in community property law, which means that a couple's property can be considered community property as long as both parties agree.
If you live in one of these states, Kress said it's important for you to look at your student loan specifics "because then the lender could technically come after the estate. This would be unusual," she explained, "but it's still important to read the fine print."
3. Does your private lender offer student loan death forgiveness?
Even if your private student loans are co-signed or you live in a community property state, you still may not need a life insurance policy for your student loans. Why? Because many of the best private lenders today now offer death forgiveness on their student loans.
Check with your lender to find out if they offer this benefit. If they don't, taking out a life insurance policy could be a smart move. Or you may want to consider refinancing with a lender that does offer student loan death forgiveness.
And if you're a co-signer who's recently become responsible for a student loan due to the death of a loved one, try contacting the lender. If they have a compassionate review process, your case may qualify for relief.
Disclosure: This post is brought to you by the Personal Finance Insider team. We occasionally highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team.
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