According to a report by the The Institute for College Access and Success, in 2011-2012 nearly 1.4 million undergraduate students borrowed $5.5 billion in private student loans. With college costs rising, it’s not surprising that students are having to resort to private student loans in order to cover their tuition, but what isn’t represented in that figure is how many of those students required cosigners in order to get those private loans.
The majority of undergrads who take out private student loans likely have a cosigner on those student loans. That’s because most 18-year-olds haven't built a credit history when they apply for those loans and don’t have sufficient income in order to qualify for the loans on their own. Banks and lenders are, therefore, wary to lend to them without someone else guaranteeing the loan. Usually parents, spouses, friends, or other family members cosign student loans for these students. This ensures that they qualify for the loans and often secures them a lower interest rate.
Cosigners and Being Liable in the Event of Death and Disability
While most cosigners understand that by cosigning the loans they are responsible for repayment if the student fails to pay them back when they graduate, they might not fully understand their responsibilities should that student die or become disabled. Many cosigners falsely believe that the student loans would be discharged should either of those two things happen and that they wouldn't be responsible for them. That’s because that’s what happens with federal loans in the event of death or permanent disability.
Unfortunately, that's not true with all private student loans. While some private student loan companies do discharge loans in the event of death, other lenders may try to get the balance of the loans from your estate or your cosigner. In the case of a lender going after a cosigner in the event of a death, the remaining balance might even be due immediately. That can often create an extremely stressful situation in which a family member or friend is struggling to deal with the death of a loved one while also being asked to immediately repay the balance of the deceased’s student loans. If they are unable to, that could hurt their credit rating.
Similarly, if a student becomes disabled and unable to repay their student loans, they can sometimes get their private student loans discharged if they didn't have a cosigner. But if they have a cosigner, that cosigner is often responsible for repaying the loan.
Many people don't consider these circumstances when a healthy young person is applying for a student loan and requests that they become a cosigner. However, the worst could happen and, unless the person cosigning the loan expects to be able to repay those loans, it makes sense for either the borrower or the cosigner to invest in insurance.
You Should Protect Your Cosigner
If you have private student loans and a cosigner, you should consider taking out a life insurance policy on yourself with your cosigner as a beneficiary. This life insurance policy would repay the loans in the event that you passed away. If you cannot afford to buy a policy yourself, your cosigner might be willing to pay for it in order to protect themselves. Given that the amount of insurance necessary to cover your student loans would be relatively small compared to most life insurance policies, it would likely be extremely cheap to get a term life insurance policy that would provide enough protection.
Similarly, consider protecting your cosigner in case you were to become disabled and unable to work by getting disability insurance. If you have disability insurance that can replace your current income and allow you to continue repaying your loans yourself, your loans won’t become your cosigner’s problem.
Keep in mind that signing up for any insurance policy is a pretty significant financial decision. How helpful such a move can be is entirely on a case-by-case basis. Each individual situation will have different circumstances that may or may not make such a move useful. At any rate, this is simply an opinion article and should not be taken as professional financial advice.
While many people don't want to think about the possibility of becoming either disabled or dying, it's important that you plan for the worst in order to ensure that you or your cosigner is protected. It would be unfair if your cosigner faced financial challenges and damage to their credit score from having to repay your student loans if you become disabled or die. For that reason, it's critical that you make sure that they are protected by investing in insurance to protect them.