College Loans: Insuring the co-signers

The issue of college debt is beginning to hit the press on a regular basis. Why?

• Congress is discussing doubling interest rates on federal loans.
• College tuition costs are twice the rate of inflation.
• Prospects for well compensated employment remain dim for recent grads.

According to a Federal Reserve Bank study and the Project on Student Debt*:

• 43% of all Americans under the age of 25 had student debt in 2012 (25% in 2003)
• The average debt for those under age 25 was$20,326 ($10,649 in 2003)
• Two thirds of college seniors graduating in 2011 had an average debt of $26,600*
• In Maine, the average student loan debt was $26,046 held by 71% of graduating seniors*

• Maine Maritime Academy $41,328 / 83%
• University of Maine $29,753 / 75%
• University of Southern Maine $23,891 / 85%
• Bowdoin College $17,569 / 35%
• Colby College $22,367 / 35%
• College of the Atlantic $20,858 / 69%
• Husson University $27,089 / 85%
• Overall U.S. student debt is approximately $1 trillion

Most lenders require a co-signer for student loans to help secure the debt. That means parents are on the hook if their student defaults –and lenders cannot be very forgiving when it comes to collection.

Here is how insurance can help protect those who are guaranteeing debt repayment. If, heaven forbid, the student borrower died or was disabled, parents opting to pay for life or disability insurance on their children will be better protected than those who are not.

The price for term life insurance on our insurance calculator for a healthy 20 year-old is about $11 per month for $100,000 in coverage and is guaranteed for a term of 20 years. The beauty of such a policy is that once it is issued, the coverage continues despite any change in health status.

If the borrower was disabled during the life of the loan,the co-signers would still be on the hook for the loan repayment. Disability insurance costs are based on age, health and income. Obviously, a young graduate is unlikely to be earning a high salary early in their working life so buying a policy with a future increase option (FIO) once the student has landed a full time job will allow the value of the benefit to be increased without regard for health status. Such policies can cover both partial as well as full disability by guaranteeing an income for an extended period of time.

Nothing in life guarantees us freedom from accidents or disabilities but insurance can guarantee those horrible events don’t continue the burden of debt. By buying insurance for your children when they graduate, you are giving them something of great value for their long term financial security until they are able to assume the payments. Give us call and we can discuss your needs and possible solutions.

Perhaps the best advice these days is to be very careful about assuming debt forhigher education. The ticket to a better life surely is associated with one’slevel of education and hard work but loading on the debt can postpone thebenefits of a degree by several years.

To prepare for the obligations of student loans, look at the Student Loan Game on the Maine Education Services web site as well as the Loan Calculator on the FinAid web site. In addition, take a deep dive into the world of scholarships to help defray the costs of higher education.