I do a great deal of estate planning for younger clients who are starting a family. Most of the focus for my younger clients is setting up their legal processes to protect their children. However, one of the bigger issues younger clients always ask about is how a client’s student loans will be handled if the client passes away. There is an interesting Wall Street Journal article (“WSJ”) published over the weekend about how student loan debt can reach out beyond the student’s estate and have to be paid off by loved ones.
To start off, student loans are essentially broken into two groups: public loans where the money comes from the federal government and private loans where the money comes from private banks. Many times private banks or private lenders will require a co-signer on the private loans. For undergraduate degrees that co-signer is generally the parent of the student. The issue becomes who will pay off that loan if the student dies.
[The co-signers] may be unaware that in cases where the student dies, the co-signers often are obliged to pay off the balance of the loan themselves—a requirement typically not found in federal loans.
The WSJ article goes into a personal story painting a horrific picture about how after the death of their son; the parents became liable for his student loan debt after he died in an accident because they co-signed his loan.
Mr. Bryski, a three-sport athlete, took out $44,500 in private student loans and $5,000 in federal loans to attend Rutgers University in 2001. Joseph, his father, co-signed the loans for him. The family declined to name the lender that issued Mr. Bryski’s private student loans because, his brother Ryan says, “we’re not pointing fingers. It’s not just our lender that does this.”
While climbing a tree on June 17, 2004, the then-23-year-old Mr. Bryski fell five feet and sustained severe traumatic brain injuries. The accident placed him in a coma for four weeks, which turned into two years of being in a persistent vegetative state. At the time of the accident, Mr. Bryski was three years into his degree at Rutgers.
During those two years, Mr. Bryski’s parents, Joseph and Diane, and his two brothers, Ryan and Joseph, say they juggled 12-hour shifts at the hospital and meetings with doctors with calls from creditors. From the hospital waiting room, Ms. Bryski says, she tried to call and settle her son’s credit-card and student-loan payments.
Mr. Bryski’s federal loans were forgiven by the federal government upon notice of his death but his private loans were not. Mr. Bryski’s parents are making monthly payments of $518 and his parents will end up paying $85,800 by the time the repayment plan ends. But, additional issues arose, because Mr. Bryski has died complicating the ability of a parent to pay the loans off, including:
[Most loans] stipulate that since the loan was transferred to the co-signer… the entire payment could be requested at once.
Consolidation options also were much more restricted.
Each private lender has different criteria for loan forgiveness so it is recommended that a co-signer read the fine print related to co-signer’s liability of the document before signing off on the loan. Further, if tragedy does strike, and the parents are required to pay off the loan, the parents should speak with the private lender about loan forgiveness options. It is also advised that a borrower establish automatic debit payments on the loan in case the parents do not have power of attorney.