Clients Facing Student Loan Debt? Here’s How to Help

More than 43 million Americans have student loan debt totaling $1.23 trillion—and the average Class of 2016 graduate is $37,172 in the red, according to Student Loan Hero.

While the risk of death isn’t usually high for a young, healthy college graduate, those who borrow from a private lender should know their debt doesn’t disappear if they pass away before paying it off.

Most of the time, student loans become a burden for the co-signer—usually the parents—who must assume the remaining payments. Sometimes in the case of private lenders, the borrower’s death may even trigger an automatic default, demanding immediate repayment from the co-signer.

That is, unless the borrower has life insurance to repay the remaining debt, saving the co-signer from a serious loss of assets.

The right policy depends on the situation, but term insurance is a common solution. First, the policy should cover the total amount borrowed, plus interest. The policyholder then chooses the duration of the policy—usually 10, 20 or 30 years—depending on the necessary amount of time they expect to pay off the loan.

“At the end of that period, they have the option to make it permanent insurance, let the policy lapse out and get a new term policy, or they can carry on with none,” explains Kent Rife, vice president of Advanced Strategies at CBIZ Life Insurance Solutions.

But despite rising tuition costs and rates of college graduates, the number of private student loan borrowers obtaining life insurance has not increased accordingly, says Steven Weisbart, senior vice president and chief economist, Insurance Information Institute.

“People look at the immediate list of things they can spend money on, and they make an emotional judgment,” Weisbart explains. “They think the premium for life insurance on top of everything else is too much, and after all, they’re young and healthy. There’s a hurdle that has to be overcome.”

“Everyone should own life insurance,” says Mike Edwards, owner and head of life insurance sales at Hugh F. Miller Insurance. “If you are an adult, you’re going to have some debt eventually. And part of being an adult is not leaving those things for someone else to worry about.”

How do you make that case? Here are a few tips to keep in mind.

Where to Start

Adoption may be slow, but selling a life insurance policy to a client dealing with student loans can be as simple as starting the conversation. “It’s not getting as much resistance as you’d think,” Rife says. “Considering the price of term insurance on a student is $10-20 a month to cover a $100,000 policy, the reward far outweighs the risk.”

If you’re selling life insurance with a student loan angle, Edwards recommends marketing more toward the co-signer than the borrower, “because they’re ultimately the ones who are on the hook,” he says.

For example, Edwards asks his clients, “‘If something tragic happened to your child, do you have the means to pay off their loans?’ Sometimes they’ll say yes. And I’ll say, ‘Great, but for $10 a month, would you rather not have the grief of losing a child along with their debt hanging over your head?’”

Rife has similar conversations with private student loan co-signers. “These days, people aren’t sure how their finances will stretch into retirement,” he points out. “They’ve worked hard to accumulate these assets, and they don’t want to have to dip into their personal pockets” in the event of an untimely death.

But don’t expect co-signers to approach you first, Weisbart warns. “If people understood that life insurance helps them avoid problems like this, they would approach an insurance agent,” he says. “But that’s not usually the case. I don’t think most people understand life insurance in that way.”

Making the Case

What factors should you focus on when trying to make the sale? Many private student loan co-signers and borrowers don’t know that bankruptcy rarely discharges private student loans. In addition, Edwards points out, “if you’re married and there’s no co-signer around, the borrower’s spouse is going to have to pay it off. They assume the debt just by being married to the deceased.”

Considering the active lifestyle of a young professional fresh out of college, focusing on the possibility of disability may be more realistic. According to the Social Security administration, more than 25% of 20-year-olds become disabled before reaching retirement age.

“In the grand scheme of things, they’re more likely to be disabled than they are to die,” Rife says. “I’d be more concerned that they’re not able to work and pay off their student loans than they are to pass away and leave co-signers coming up with the assets.”

And note that for federal loans, if a borrower obtains an injury that prohibits them from earning an income, the disability must be “total and permanent” in order for the government to discharge federal student loans. These injuries do not include many back problems and forms of cancer—and many private lenders don’t have provisions for disability at all.

Discussing life insurance with your clients is “part of a larger plan,” Rife summarizes. When a borrower obtains life insurance and passes away before paying off all private student loan debt, “they’re insuring the co-signer’s loss of income. In this scenario, there’s loss of assets over the long term. For example, how long is it going to take to get back to work before recovering from grief?”

It’s a sensitive topic, which means you’ll need to choose your words carefully. “I never say, ‘If they die tomorrow,’” Edwards says. “I always say, ‘If they died yesterday.’”

Weisbart agrees. “Think in terms of positive outcomes. What we want is for the payments to be made without fail. The way to make sure that’s the case is to buy insurance,” he says. “It’s not a happy outcome, but it’s a successful outcome.”

Jordan Reabold is IA assistant editor.