Your average college student with student loans will think about estate planning about as often as they think about joining the AARP. The reality is that most young people, and especially college students, rarely have to deal with any significant estate planning concern. Unfortunately, as the average amount of student loan debt continues to increase, more and more students worry about what might happen to them, and their families, should the student be unable to pay back their student loans. In situations where a student has died or become incapacitated, there are several issues about student loans you should understand.
Who is responsible for paying back a student loan?
The vast majority of college students acquire student loans through various federal government programs. In almost all situations, the students is solely legally responsible for paying the loan back. Government student loans do not require, for example, a student’s parents to sign as cosigners.
On the other hand, some students use private student loans to pay for their college expenses. Private student loans are not provided through the federal government, but are instead offered by private financial institutions, such as banks. When students use private student loans, the financial institutions offering the money usually require the student to have a cosigner or co-borrower. In many situations, the college student applying for private student loan will ask a parent or other relative to sign as the cosigner. As with other loans, should be college student borrower become unable to repay the money, it will fall to the cosigner to do so instead.
What happens to student loans if the student dies?
In most situations where college students die and leave behind unpaid student loans, it falls to their estates to repay those obligations. An estate is the collection of property and legal interests a person leaves behind after death. If a person dies and leaves behind debt, the creditors will have to try to get repaid by filing a claim with the estate. After filing the claim, it will then fall to the estate administrator to determine what creditors get repaid, and in what order.
In situations where student dies leaving behind more debt than assets, some of the creditors will not get repaid. The student’s family, parents, or other relatives will usually not be responsible for repaying the unpaid student loan debt.
However, if a student dies leaving behind a debt that has a cosigner, and the cosigner is still alive, the creditors can seek repayment from the cosigner just as they would from the original borrower.
Is there a way to protect my cosigners from having to repay my loans?
Yes. In many situations, people with student loans can acquire life insurance. As long as the potential benefit exceeds the amount of money you owe on the loan, you can use the life insurance payout to repay the loan after you die so that your parents or other cosigners will not have to.