Every few months it seems that the national press will pick up a story about a parent who is stuck paying the student loan bills of a recently deceased child. This week we learned the story of a mother, whose child was murdered. She requested that the lender, in this case an agency of the state of New Jersey, forgive the remaining student debt.
Instead of forgiving the loans, the Higher Education Student Assistance Authority of New Jersey told her the following: “Please accept our condolences on your loss. After careful consideration of the information you provided, the authority has determined that your request does not meet the threshold for loan forgiveness. Monthly bill statements will continue to be sent to you.”
Avoiding this Situation
A critical detail that is easy to miss in this story is the fact that the mother cosigner her son’s student loans. Only cosigners are vulnerable to getting stuck with the debt when the borrower dies. Merely being the parent of a student loan borrower does not create any obligation to pay for the loan. Being a cosigner can create this obligation.
Accessing the Situation
It is also important to remember that each loan is different. Loans are merely contracts between the borrower, the lender, and sometimes cosigners. Some lenders may have language inside the loan contract that dictates that the debt is forgiven in the event of the death of a borrower, others may not. Step number one in avoiding this particular nightmare is investigating whether or not it can happen to you.
Eliminating the Risk
If there is a chance that the death of the borrower could mean bills for the cosigner, there are a few options that can be pursued.
Option One: The Cosigner Release – Many lenders will advertise that cosigners can be released from the loan once the borrower meets certain conditions, such as no missed payments, a good income, etc. What these lenders don’t mention is that actually getting the cosigner release approved is very difficult. Because the lender has no incentive to release the cosigner, they will be really picky about letting it happen. Lenders always prefer to have two people legally obligated to pay off the loan instead of one. However, even though this option is difficult, it can still happen and is definitely worth investigating.
Option Two: Life Insurance – Thinking about life insurance, especially for a child, is a depressing thought. Unfortunately, it is a reality of the world in which we live. If there is any good news it is that a life insurance policy for a healthy young person is very affordable. The key is just to get a policy that pays out enough to cover the student loan debt.
Option Three: Move the Debt – Depend upon the finances of the borrower, one simple solution would be to refinance or consolidate the debt with another lender. By going this route, the new lender pays off the old loans entirely, and the borrower now has to pay off the new loan with the new lender. Once the old debt is paid off, the cosigner no longer has any obligation (unless they cosign on the new loan). Another advantage to this route is that the borrower may also be able to get lower payments and a lower interest rate. We have reviewed over a dozen companies offering this service. The success of going this route will depend upon the income, credit score, and debt ratio of the borrower. If these numbers are strong, the borrower gets lower payments and the cosigner doesn’t have to worry about being the victim of a student loan horror story.
Discussing finances with loved ones is normally a very difficult conversation. Added a discussion of what would happen if somebody died is even more difficult. While these conversations and the steps recommended are not fun, the unpleasantness pales in comparison to getting a monthly bill/reminder of the loved one who died.