Who is On The Hook for College Loans?

March 24, 2013 at 5:16 pm Leave a comment

Other than home and auto insurance, I generally don’t buy insurance, whether it is on appliances or mortgages or life.  Instead of paying premiums, I “self insure”, meaning I have enough money saved up to cover the occasional crisis.  But a recent article on bankrate.com made me realize that college loans was an area where this was not a conscious decision on my part.

The article explains that, if my children take out a federal student loan – which my daughter has done – there is a “death discharge” clause if – heaven forbid – the child dies.  “That means the borrower’s survivors can complete paperwork releasing them and the estate from any responsibility for the debt.”

But a private loan such as many students and parents take out from a bank to pay for college probably does not have a “death discharge”, meaning that the parents could be on the hook to pay back the full loan, even if the child died and would never generate any income.

So, (a) check the paperwork on your loan to see if there is a death discharge and (b), if not, consider whether you should take out a life insurance policy on the student in an amount big enough to pay off the loan.   If having to pay off those loans out of your savings would break the bank, then you need insurance.  Luckily, term life insurance on a young person is pretty cheap.  And the more your child borrows, the more this becomes an issue, so if the kid is heading off to medical school or plans to take out lots of loans, you’ll want to read the full article.

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Entry filed under: Paying for College.

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