You read the headline and are now wondering whether the student loan forgiveness will affect your insurance policy. Well, the answer is a definite YES!
Let’s dive into the details.
President Joe Biden announced on August 24 that most federal student loan borrowers would be eligible for some forgiveness.
This is excellent news for many individuals struggling to keep up with their monthly payments. It will also help ease the burden of student loan debt for those just beginning their repayment journey. A hidden benefit of student loan forgiveness that many don’t know about is its impact on your life insurance policy.
How Does Student Loan Forgiveness Affect Your Current Insurance Policy?
Paying off your student loan debt with life insurance is viable if you wish to pay it off early. This is where debt forgiveness might come in handy.
Life Insurance assists your loved ones and dependents cover expenses after death. With a life insurance policy, you’ll pay the insurance company a monthly payment known as a premium.
One of the most basic ways to use your life insurance to pay off your federal loans is to build up enough cash value in your policy to use it to pay off student loan debt. Depending on the policy, you may have to wait ten years to use your cash value or borrow against your policy without penalty.
Another option is that some life insurance policies, such as indexed life insurance (IUL), allow you to withdraw the accumulated cash value tax-free. You are not required to repay the funds; instead, you must accept that it will reduce the death benefit later.
Suppose you have something like this in your plan and have applied for one of the mentioned federal grants. Having your debt forgiven could save you $10,000 to $20,000 on your life insurance policy.
And as mentioned before, you can use a life insurance policy to pay off your student debts. So, if you have no debt to pay off due to the student loan forgiveness, you can direct the additional finances towards the death benefits for your family as per your life insurance policy.
How Much Student Loan Forgiveness Will You Receive in 2023?
The loans are primarily relevant to borrowers who have received the Pell Grant. Suppose you did not receive a Pell Grant, a type of financial aid available to low-income undergraduate students. In that case, you could receive up to $10,000. And you could receive up to $20,000 if you did.
The administration’s relief will only apply to low-income students and borrowers who make less than $125,000 per year. If you fall into this category, there’s hope for an extension on your student loans.
Furthermore, couples or heads of households earning less than $250,000 can benefit from this student debt forgiveness.
One extra thing to note is that the debt is forgiven for those individuals and couples whose income was below the mentioned caps in 2020 or 2021. And student loans taken out after June 30, 2022, will not be included in the relief.
What Types of Student Loans Qualify?
Approximately 37 million borrowers will be eligible for forgiveness based on their loan type if they fall under the income cap.
The loan types eligible for forgiveness are as follows:
- William D. Ford Federal Direct Loan Program
- Direct Stafford Loans
- Direct Subsidized & Unsubsidized Federal Student Loans
Furthermore, Parent Plus and Grad Loans are also eligible for student loan forgiveness under the Direct program.
Currently, the Education Department claims that any loans it holds are eligible. By that claim, the student loan forgiveness may exclude approximately 5 million borrowers with a commercially held Federal Family Education Loan (FFEL).
Approximately the same number of borrowers have FFEL loans with the government, and they need not be concerned.
Is It Beneficial in Any Way?
Receiving any sort of student loan forgiveness is a huge benefit to begin with. And since this applies to loans that are associated with government related grants, this benefits people who have those type of loans.
But don’t take this information at face value. Your personal situation may or may not allow you to benefit from this relief. Always make sure to consult with an expert.
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February 9th, 2023 · 5 mins read
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