The Dangers of Co-Signed Student Loan Debt



According to the CFPB, over 90% of student loans are co-signed.  If you’re like millions of young Americans with co-signed student loans—or if you are a co-signer— consider what would happen to that debt if you—or the borrower—dies.

 

Federal loan debt dies with the borrower, but private loans don’t have the same consumer protection clauses; if something happens to the borrower, it’s generally up to the co-signer to continue the payments. While lenders might be willing to work with co-signers, they are under no obligation to reduce the balance or change the payment terms.

If you’ve co-signed, you’re legally obligated to repay the loan if the borrower doesn’t pay.  Student loan servicers regularly garnish Social Security payments and tax refunds, so if you end up on the hook for student loan payments, you could see a significant portion of your disposable income garnished until the debt is paid off, even if you simply co-signed the loan.

 

So what can co-signers do to protect themselves financially?  Get life insurance.  A life insurance policy on the borrower can provide funds to repay the loan should the borrower die.  With a term life insurance policy, you purchase coverage for the life of the loan.  It’s a cost-effective way to go, especially if the borrower is young and healthy.  A $50,000 policy on a healthy 25-year old woman is less than $5 a month – an easy way to provide peace of mind to borrowers and their co-signers.

CFPB stands for Consumer Financial Protection Bureau.

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