Students and parents can sometimes take out a variety of student loans without giving any thought to what would happen if the benefiting student passed away before the loan was repaid. Unfortunately, many people believe that student loans are discharged in the event of the student's death; however, this is only uniformly true in the case of federally-issued student loans. For this reason, both students and parents should be keenly aware of this possible disadvantage of private student loan lending.
In the case of all federal student loans, including Subsidized, Unsubsidized, PLUS loans, and Perkins loans issued via the student's college or university, a loan is discharged if the student who benefited dies before the debt is repaid. In the case of PLUS loans, if the parent dies before the loan is repaid, the loan is also discharged. You can find out more about student loan forgiveness, discharge, and cancellation at the U.S. Department of Education's Federal Student Aid website.
Private loans, however, are not always discharged in the event of death. This is one of the best reasons students with a significant amount of private student loan debt should consider taking out a life insurance policy large enough to cover the costs of their student loans and any interest accrued. If your parent cosigned on your private student loans, naming them as the beneficiary on such a life insurance policy would relieve them of the burden of having to repay your student loan debt.
If you took out private student loans in your own name, are married, and live in a community property state, you should also consider taking out a life insurance policy, and naming your spouse as the beneficiary - as your spouse may be held responsible for your private student loan debts in such states, even if he or she did not co-sign or stand to benefit from any portion of your loans. Your lenders will first try to collect the debt from your estate, a co-signer (if relevant), and then your spouse, if state laws allow. Community property states currently include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska allows its residents to opt-in to a community property agreement, if they so desire.
It should be noted that some community property states do have educational loan exemptions, and some private lenders discharge student loans in the event of the debtor's death. If you're shopping for private student loans, make a point of finding out what your potential private lender's death discharge policies are before you make any key decisions. If you were previously unaware of your lender's policies, you can still safeguard your loved ones from the burden of student loan debt by taking out a term life or permanent* life insurance policy.
If you have questions about life insurance basics, or you'd like more information about how student loans work, be sure to consult the Protective Learning Center.
*As long as required premium payments are timely made.