According to a CNNMoney article, a woman recently died, leaving behind over $200,000 in private student loans for her parents to pay off. How can you avoid this situation?
Prevention is better than cure…
The first thing you can do is understand the difference between Federal Loans and Private Loans. The first one is created by the government, and the second one is created by the private sector. Federal loans are always better – they are easier to get, and in this situation they would have been written off. Also, Federal Loans usually have income-based-arrangements which Private Loans do not have.
But if you had not choice but to borrow private loans, there’s something else you can do.
…But cures still exist.
If you graduated from college with lots of private loans, you’ll want adequate life insurance to pay it off if you die unexpectedly. I know, you might be young and think that the chances of dying are slim – but right now that’s not the problem. The problem is that IF you die, private loans don’t get written off – someone will have to pay them out of your estate. If you have a co-signer, it automatically becomes that person’s problem. Personally I believe private loan borrowers should have life insurance with the cosigner as a named beneficiary (up to the amount of the loan). If the co-signers are your parents, then this is even more important.
Additionally, after a few years of paying your debts on time, you should be able to refinance your private loans without a co-signer. This way if anything happens to you and your estate has no assets, you’ll be okay. Don’t forget though, that you will need to have disability insurance because while chances of dying are slim, chances of being hurt or sick for more than a few days are quite significant. Be prepared!
Student loan borrowers do not have to go through this. You can prepare and avoid these traps. If the borrower cannot pay for the insurance, then the co-signer should pay for it him/herself. It’s a small price to pay.