As a 20-something adult I recently read a blog posting about parents getting life insurance policies for their children. This is a very wise decision for parents that are cosigning for their children’s student loans. In my case my mother had a valid concern, a number of health issues just make it a good idea for me. What about those without the bodily ailments I possess? Why are their parents getting life insurance?
Student loan debt is a very special case in American law. In 2005 there was a change in how private student loan debt was handled. It is very difficult to have any student loan debt discharged, even through bankruptcy. Many universities are now charging exorbitant tuition that is limiting to many young career professionals’ finance. The bankruptcy limitations on student loans and the high cost of education make this kind of debt even harder to pay. For parents whose child has passed life is already miserable; on top of mourning their child they now also have 10s of thousands of dollars in unexpected debt. Life insurance policies just make sense.
There are two kinds of life insurance policies, term and whole life. Term is for a very specific timeframe and is rather inexpensive. Whole life is much more costly but can provide a good investment for a family’s primary breadwinner. The majority of parents’ student loan life insurance policies will most likely be term. Life insurance for an under-40 non-smoker can be as little as $10 a month dependent on the payout and health of the person.
According to some reports from 2011, nearly 51% of California students graduate with student loans with average debt being approximately $19,000. Should their child unexpectedly pass those California parents who cosigned for their loans are stuck with a large burden that they may not ever be able to pay or discharge. Here in Sacramento, CA the average home sale price for the first quarter of 2013 is still less than $200,000. At 10% or more of the average home’s value in today’s market, a dead child with student loan debt is bad news.
The situation is unlikely to change any time soon. The Obama administration has been gunning for private education for some time and many of the gaffes the private education industry have led to reform in policy and law at the collegiate level. While it seems a macabre recommendation, life insurance for a child whose parents have cosigned for student loans is probably the best bet for all involved.