I just read an article about cosigner parents on student loans being held responsible for loans after the death of the student in question.
I understand the legalities of it but i have an oddball question.
I am under the impression that anyone who has a financial interest in you being alive can purchase life insurance on you, children, spouses, employers, business partners, etc.
Your average college student is young and about as healthy as they ever would be. Life insurance for them would be pocket change. Why not roll some cheap life insurance package into “unforgivable” loans so that such loans do not blow back to families who just lost a 22 year old child to tragic circumstances and hold them responsible, (in the article, the son was murdered).
I know the people involved could take out life insurance as well, just seems like a place where it being bundled would be prudent for the families as well as the agencies backing the loans.
A lot of people don’t seem to get that cosigning on a loan means that you are on the hook if the original borrower can’t or won’t pay for any reason. You (OP) talk about them being ‘held responsible’ like it’s some unexpected legal maneuver, but it’s really straightforward in the paperwork that if you co-sign you are saying “I will pay for this loan if he/she doesn’t”. Since people often don’t get the concept, they don’t realize that taking out insurance would be a good idea, plus taking out insurance means talking about your kid dying.
I understand the concept completely that cosigners can be left holding the bag for any reason. My inquiry is because student loans are pretty much immune to bankruptcy and such that a proverbial “parachute” package would be extremely prudent and would probably be seen as a nice feature that such a loan would never fall to family and friends. Im pretty sure most people figure they might end up covering a few payments as a cosigner under various circumstances. Cars and homes can be reposessed and in many cases the lender resells the asset and goes on with their life. With home loans there are often requirements for insurance because the loss of the asset would be an unrecoverable disaster for many new home buyers, but no such issue with a 100,000 student loan seems like it would be kinda an obvious feature
I think the main reason why insurance isn’t bundled in with the loans as a requirement is that it must somehow be illegal.* I’ve never had any loan where the insurance bundled in with the loan was required, but it is always offered. And I suspect many people don’t want it. For a few reasons, some good, some bad. There is of course the fact that people consign and somehow figure they will never have to pay off the loan. There is also the issue of what kind of insurance will be bundled. Will it be like the policies offered to me on credit card accounts and car loans, where I might pay the premiums for years and if I die with one $500 payment due, that’s what insurance pays out ? I’m better off buying a real life insurance policy separate from the loan. Some situations don’t require insurance - if I cosigned on a $25K loan for my daughter, I probably wouldn’t bother with insurance.
And then there is perhaps the biggest issue of all - what are the chances that I will have to pay due to the borrower’s death vs the chances I will have to pay because the borrower can’t afford to or just stops making payments? I suspect the latter is more likely to happen and there is no insurance for that.
Finally found it here “Lenders can’t deny you credit if you don’t buy optional credit insurance - and if you don’t buy it directly from them.”
Generally, bundled insurance is not as good as insurance found on the private market - or at least, that’s the perception. Plus, a lot of those bundles are specially tied. I love the one where you can buy disability / sickness insurance and such on your credit card balance. Read the fine print, your rate is based on the balance, but they will only pay the minimum each month - typically about 5% while the interest would be about 2.5% and they hope you continue to drive up the balance. So for a decent contribution to the bank prez’s retirement fund, you get basically almost nothing unless you are permanently disabled.