Key Terms
- A student loan rider can be helpful for those who have a temporary disability, but it is not as beneficial if you become totally and permanently disabled.
- The availability of a student loan rider lasts between policy dates of 10 to 15 years, depending on which option you choose.
- Before making a final decision on buying a student loan rider, you should consider all your options, including purchasing a larger insurance policy.
Student loans are one of the leading causes of overwhelming debt in the U.S. According to Experian, the total debt for student loans in 2020 reached a record high of $1.57 trillion. It is no wonder so many people are dealing with stress and anxiety as they attempt to pay off these massive loans while still trying to keep up with their other financial obligations, such as their mortgage, rent, and utilities.
While college graduates who find a good job may not have much difficulty keeping up with their lender’s monthly payments and loan balance, many may wonder what would happen if a sudden illness or injury prevented them from working a regular job.
A disability insurance policy is designed to help you avoid serious debt issues if you become disabled while you still owe money on your loan. In addition to your insurance policy, you can purchase a student loan protection rider. It is important not to confuse a life insurance policy and a disability insurance policy. If you have a qualifying claim, the student loan protection rider will provide the borrower additional monthly benefits toward their student loan payments. That add-on is designed to help disability insurance policyholders with their student loan debt repayment.
Many people have realized student loans can be complicated to discharge when faced with bankruptcy. And although some student loan borrowers can get loan forgiveness, reimbursement programs, and repayment plans, many people unfortunately do not qualify. The recent pandemic has also contributed to the large amount of debt that has accumulated in recent years, and the increase in private loans with some predatory interest rates further exasperates the debt crisis.
As people were out of work, many could no longer pay their student loans. That caused them to turn to other options, such as a deferral or forbearance. Experian reported the amount of student loan debt not in repayment went up by a staggering 114% in 2020. The decrease in student loan repayment throughout the country caused the total debt to increase rapidly. In short, borrowers are not paying or cannot afford their student debt.
When you cannot repay your student loan, the debt can get out of hand very quickly. And since we never know what the future holds, you might consider a student loan rider to help cover your student loan payments.
While that may be a good choice for some, keep in mind other options, such as purchasing a more comprehensive individual disability insurance policy, can help as well, especially since it may have protections for a broader array of concerns, such as long-term disability or permanent disability.
How the student loan rider works
The specifics of a student loan rider will differ depending on the carrier you choose, whether they are a public (state or federal government) backed loan or a private loan, and on the loan amount. But they all generally have the same provisions. For example, a student loan benefit will only be paid if the individual has a total disability. If your disability is residual, which means you can still work in a limited capacity, you will not be eligible to receive student loan benefits.
The availability of the student loan rider is between a 10 to 15 year term, depending on which option you choose. The term starts on the date the rider is issued and not on the date your disability was determined. Therefore, if you decide to get a 15-year term student loan rider, and an accident or injury leaves you disabled five years later, the borrower will only receive the student loan rider benefits for the remaining ten years.
There is always a minimum and maximum amount regarding rider benefits depending on your policy and lender. The minimum amount can range from $100 to $500. And the maximum range can be anywhere from $2,000 to $2,500 per month. The payments are often made directly to the loan provider, and like with any base policy, there will be an elimination period for your student loan rider.
Should I purchase a student loan rider?
When considering a student loan rider, it is essential to consider the pros and cons and choose the option you feel would work best for you now and in the future.
One of the best things about a student loan rider is no medical questions or exams are involved. If you already have a medical issue, this may be the best way to get additional disability insurance you would not be able to get otherwise. You only have to be disabled for two years to receive the maximum benefits with most student disability riders. For most plans, every six months you are disabled, you will receive $50K as a lump sum for your student loan. Therefore, you will maximize your benefits if you are disabled for two years.
On the other hand, when choosing a student loan rider, there are some downsides. You will still need to qualify for a standard disability insurance policy, and you can only get around $200k insured. Therefore, if your loan exceeds that amount, you will still be stuck with some substantial debt.
Additionally, purchasing insurance you already have or do not need is not a good idea. A student loan rider only benefits you financially if you have a temporary disability. The fact is if you have federal student loans and then become permanently and totally disabled, they will go away. And if you have refinanced your student loan, as with most companies, your loan will be forgiven if you are diagnosed as permanently disabled. Many companies will also offer hardship referrals.
In closing, while a student loan rider may be helpful in some cases, it is essentially just a product designed to be marketed and sold. It is more of an additional financial product that can help insurance companies make money, versus a financial safeguard that will protect you in the future. In most cases, a better option would be to purchase a more considerable disability benefit or invest your money into something worthwhile that will help you if you fall on hard times.
Joshua Holt is a licensed insurance agent (License #2785989) and founder of Biglaw Investor and Sidebar Insurance LLC, an insurance agency created by lawyers, for lawyers. His insurance expertise lies in the areas of life and disability insurance, particularly covering lawyers, doctors and other high-income professionals. Prior to Biglaw Investor, Josh practiced private equity mergers & acquisition law for one of the largest law firms in the country.
