College Loan & Tuition Insurance: What Employees Need to Know
As a College Coach finance educator, I work with families at all phases of the process to help them feel confident when the time comes to pay. Understanding the full financial ramifications of the college process is a key to mitigating stress. One important element that doesn't come up often enough in the planning process is what happens to a college loan if something happens to a parent or child (see this report of students being forced to repay loans in full when their co-signers passed away).
Life Insurance for LoansIf an employee is considering co-signing a private education loan for his or her child, I remind them to ask the lender in question about any co-signer release options and/or discharge provisions. If none exist, there's the possibility of purchasing life insurance to protect the family in the event of tragedy. This is critical to peace of mind because education loans are, in most cases, not dischargeable in bankruptcy. Protections built into federal education loans (deferment and forbearance provisions, income-dependent repayment plans, and death/disability discharge) are not guaranteed by private loans. This means the loan obligation continues even in the face of tragedy.
The Rules of Private Education LoansInsurance protection becomes important because private student loans, unlike their federal counterparts, are not automatically cancelled in the event of the death or permanent disability of the student (or borrower, if that is the parent). Private education loans, in most cases, live on, haunting the loan's co-signer (usually a grieving parent) until the loan is paid off. We've seen headlines in newspapers across the country lately about parents who tragically lost their children. Adding to these parents' suffering was the harsh realization that they were now strapped with tens if not hundreds of thousands of dollars of debt in private student loans they had co-signed for educations.
Private Tuition InsuranceOccasionally parents will ask me about tuition insurance offered by third-party vendors through colleges. This type of insurance shows up in mailboxes of incoming freshman at some schools. It says it will refund a semester of tuition if a student has to withdraw for covered medical reasons.
For most people, this is unnecessary. Most college students are young and healthy, and probably won't have to withdraw for medical reasons. On the off chance they do withdraw, the cost will be essentially a semester's worth of charges. That's nothing to sneeze at, but it's not as dire as the four years of loans discussed earlier. Whether you get your money back will depend on the timing of the withdrawal. Though individual school's refund schedules vary, withdrawing early in the semester will generally get most tuition back from the school; withdraw late in the semester and you'll probably take an "Incomplete" and make up remaining coursework later. This makes tuition insurance useful only for the risk of mid-semester medical withdrawals. And among those, you have to look out for exclusions for things like pre-existing conditions and mental health withdrawals. Some parents might want such plans for peace of mind, but I think they're of limited benefit and not worth the money to the vast majority of folks.
The Bottom LineFor employees, preparing to send a child off to college for the first time is a process often filled mixed emotions: elation, fear, sadness, pride, stress; it's an exciting time in the life of a family. And while working parents nearly always have worries associated with sending a child off to school, both for their child (how will she adjust to living on her own?) and for the family's finances (how on earth will we pay for this?), parents often don't consider all the scenarios of financing a college education. Expert assistance and early college planning can go a long way toward reducing the stress of the college transition for working parents, and ensuring employers they can work through the process with minimal distraction.
March 15, 2020