Disability Insurance Student Loan Riders: Are You Making This Big Mistake with Your Disability Insurance?

Student loan riders are an optional addition to a long-term disability insurance policy. They’ve gained popularity over the past several years due to the huge accumulation of student debt among U.S. college graduates. 

A student loan rider offers a monthly payment benefit toward your student loan debt during the disability period. This sounds like a no-brainer if you have a large amount of student debt, right? 

Well — that’s what most independent insurance agents would assume.

What to know about student loan riders

If you suffer a covered disability defined under your insurance policy, a student loan rider makes a predetermined payment toward your student loans for every month you’re disabled. 

Four of the “Big 5” disability insurance companies (Guardian, MassMutual, Principal, The Standard, and Ameritas) now offer this optional rider. Principal is the only one of the Big 5 that doesn’t currently offer this rider, but it could be only a matter of time before they offer it as well.

How much does a student loan rider cost?

Like any type of insurance coverage or rider, the cost associated with a student loan rider depends on your specific circumstances. 

Consider a 38-year-old female veterinarian who’s currently in good health. A Big 5 insurance company quoted them a base price of around $2,100 a year for coverage up to age 65. It has a monthly benefit of $5,800 should the doctor become disabled (this all depends on factors like your occupation class, annual income, gender, existing disability coverage and age). 

To add on a student loan rider that pays $1,000 a month toward their loans in the event of a disability, the annual price is about $165. This rider has an elimination period or waiting period of 90 days and a benefit period of 10 years. 

It might not be that expensive in the overall scheme of disability insurance. Many agents add this rider for clients who have student loans because they believe it provides an extra level of comfort and security. 

Likely a contributing factor to the lower expense of this rider is the fact that if you suffer a total disability with federal student loans, the government discharges your debt completely (you’d have to meet the Social Security Administration’s definition of totally permanently disabled). 

However, many people don’t realize that most disability claims under long-term disability policies aren’t permanent disabilities and wouldn’t result in your debt being discharged. Still, why pay an extra $165 every year if you don’t actually have to?

Who needs a disability insurance student loan rider?

If you’re a private student loan borrower, or have ever refinanced your loans, student loan forgiveness is no longer an option for you. This means that your payments aren't based on your income. If you become disabled, your lender will still want the same payment you were making before your injury or illness. 

A student loan rider in this situation is an excellent addition to your policy, considering it doesn’t add a large burden to your monthly premiums. If you become disabled, your loan payments would likely eat into a large portion of your monthly benefit, decreasing your standard of living. 

Best of all, if you pay off your student loans at any time, you can drop the rider from your policy and decrease your premium. If you have private student loans with a high amount of debt, consider this rider mandatory.

Who doesn’t need a student loan rider?

This question is highly dependent on an individual’s circumstances, and if you’ve had a consultation about your student loan debt. In general, a student loan rider might not be a good fit, regardless of how large your student debt is, if you satisfy a couple criteria: 

• You have federal student debt and are on an income-driven repayment (IDR) plan (e.g. SAVE, PAYE, IBR, ICR).
• You’re paying for the disability insurance premiums yourself (not your employer), and you’re single with no plans to marry (or file your taxes separately from your spouse, or they don’t work).

When you’re on an IDR plan, your student loan payment is based on your adjusted gross income (AGI) reported on your tax return. If you’re paying your insurance premium yourself, the monthly disability benefit is actually tax free. 

Let’s say our veterinarian receives a $5,800 disability benefit every month, and their tax return says they earned $0. As long as they don’t have a spouse who’s earning an income, now their required student loan payment on any IDR plan is $0 a month. Most importantly, if they were on the SAVE plan, there would be no interest accruing on their loans either.

In this scenario, they wouldn’t significantly benefit from having a student loan rider. The additional spend of $165 a year would be an unnecessary premium that most insurance agents wouldn’t understand.

Other optional disability riders to explore

A student loan rider might be useful depending on your unique student loan scenario. There are also other types of long-term disability riders to consider:

• Catastrophic disability (offers an additional monthly benefit if you can’t perform two of the basic, daily living tasks, like bathing or feeding yourself). 
• Benefit increase rider.
• Future increase option.
• Cost of living adjustment.
• Residual disability.

Although a residual disability rider is technically optional, many agents, including myself, believe this is the most important rider and aren’t comfortable recommending a policy without it.

Ultimately, disability riders are optional coverages that can either greatly enhance your income protection, or are unnecessary depending on your personal circumstances. 

If you’re interested in getting an own-occupation, long-term disability insurance quote or life insurance quote from a student loan debt expert who has helped clients with over $43 million of student loan debt, fill out this quote form.