Are Student Loans Forgiven at Death?

Parents of college bound teens invest a lot of time and energy into figuring out how to finance their children’s education. They spend innumerable hours poring over FAFSA forms, financial aid formulas and tax returns. The reality is that parents often wind up making an agreement with their child, telling them they will borrow the money from wherever they can. In return the student agrees that they will be responsible for repaying some or all of the education debt.

Through all of their research and negotiation, most parents never consider whether these student loans will be forgiven at the death of the student. The easy answer is that there is no easy answer, it all depends on the type of loan and conditions of the lender.

Types of college loans:

Federal Student Loans: There are many reasons why federal student loans should be the first resource to finance a college education. These loans are a liability to the student only, if the student passes away the debt is discharged.

According to studentaid.ed.gov

If you, the borrower, die, then your federal student loans will be discharged. If you are a parent PLUS loan borrower, then the loan may be discharged if you die, or if the student on whose behalf you obtained the loan dies.

Private Student Loans: About 90% of private student loans have cosigners, usually parents. If the student dies their estate will be responsible for the debt. Additionally, should the parent cosigner pass away the note could immediately become due in full.

Federal Plus Loans: These loans usually offer competitive rates and are taken out by parents. These loans are discharged should either the parent or the student pass away.

Mortgage, Home Equity, 401K Loans, Life Insurance Cash Value Loans: It is common for parents to utilize any and all of these funding resources to finance their children’s education. Obviously with any of these types of loans the borrower is responsible for repayment of the debt regardless of the circumstances of the child.

Parents put their income, their homes and their retirements on the line to ensure that their kids go to college. They knowingly accept this risk and they trust that the child will repay the debt as agreed. Unfortunately there is that one significant risk these parents have taken on. It is a risk so unbearable that they probably have never considered it. What will happen if their child dies before the debt is repaid?

Steve and Darnelle Mason are living this nightmare. When their daughter Lisa passed away at age 27, the Masons became guardians of Lisa’s three children. They also became solely responsible for over $200,000 in student loan debt. See TODAY: After daughter’s death, parents plead for forgiveness of her $200K student-loan debt

It is so difficult for parents to think about this that they put their financial well being and their retirement at risk without even realizing how simple it is to transfer this risk elsewhere. Namely to an insurance company. An 18 year old in good health can get a $200,000 life insurance policy for about $13 per month. It is important to realize that with any life insurance policy you are not insuring yourself against the odds of the person dying, the odds of any one child passing away are miniscule. What you are insuring yourself against is the financial consequences of that child dying.

If you have leveraged your security, your home, your retirement to finance a college education, the financial consequences of your child passing away are unacceptable. Considering that risk and how it can be transferred should be just one more step in the college financing process.

There may be hope on the horizon.

New York Senator Chuck Schumer recently proposed legislation that would require private student loan providers to forgive the debt should the student pass away. At this date it is unknown whether that legislation will pass and become law, but it is worth noting that he proposed this same legislation in 2013 and it did not pass.

Should legislation to that effect become enacted it will save some families from financial ruin. It will also save families from having to think about the unthinkable as they make plans for their children to go off to college. Until that day comes, a real risk remains to too many parents.

Marcy Tooker

The Tooker Agency

Riverhead NY

631-502-0000

marcy@thetookeragency.com