When it comes to topics that college students are likely to know little about, estate planning is near the top of the list. The reality is that most young people have little incentive to consider what might happen in the event they become incapacitated or die. Nevertheless, with rising student debt amounts, and more and more students choosing to opt for private student loans, the issue of what might happen to these debts should a college student die or become incapacitated is important to understand. To help explain the relevant details, let’s take a look at a few important ideas.
Student Loan Debt
When most people take out student loans, they do so through one of several federal student loan programs. College students who take student loans, or who receive federal grants, do not usually use a cosigner. (A cosigner is someone who signs on as co-debtor, and who becomes equally responsible to repay the loan should the original borrower fails to make payments.)
Death and Death
What happens to your debts should you die? Though the answer depends on several factors, the general principle is that your estate will become responsible for paying back any money you failed to pay back while you were still alive. Your estate is simply the collection of property and obligations you leave behind after death.
So, for example, let’s say you die leaving behind $50,000 in student debt, but only $20,000 in assets. In this situation, your debtors will have to file a claim with your estate. The person who controls your estate, known as your personal representative or your estate administrator, will then have the responsibility of determining which creditors get repaid, and in what order. In this situation, some of your creditors will not receive their money back.
To put it another way, only you are responsible for the debts you acquire. Should you die before paying those debts off, your family members will not be responsible for paying them on your behalf.
Cosigners and Death
If the general principle is that your family will not have to pay back your unpaid debt, there is a significant exception to this rule. College students who acquire private student loans through financial institutions such as a bank, will often have to use a cosigner before the financial institution will agree to give them the money. In many, if not most, of these student loan cosigner situations, the cosigners are the student’s parents.
So, when a student has private student loans and dies or becomes unable to pay those loans back, it can fall to the cosigners of the loan to have to repay.
Though it isn’t always necessary, some people with college loans choose to acquire life insurance as protection against the possibility that they might not repay the loan. A good life insurance is typically very affordable for young people, and can be a wise choice, especially when you have private student loans.