When a Recent Grad Dies, Who Should Pay the Student Loan Debt?

Libby Kane
Posted

Who should pay student loan debt?“When my son Donte Newsome was murdered on July 5, 2008, it felt like everything I had was taken away from me. Then a company called First Marblehead Corporation showed me how wrong I was.”

These are the opening lines of Angela Smith’s petition on Change.org, a website that hosts petitions for change begun by and signed by ordinary people.

After Smith’s son, Donte Newsome, was killed in 2008, she began getting collection calls regarding her son’s two private college loans—a $30,000 debt. Newsome had been a scholarship student for his first four years at Marshall University in Huntington, West Virginia (he was a star football player at the Division I school), and took out a combination of public and private loans, which his mother says she never thought she would have to pay after her son’s death.

Public loans are discharged if the borrower dies, but Smith’s son had taken out substantial private loans. Private lenders aren’t required by law to discharge a loan after the borrower dies, and many of them don’t (there are a few exceptions to this, including Sallie Mae and Wells Fargo, and most banks say they’ll re-evaluate the case should a situation arise).

These stories brush a tragic sheen over a particularly thorny issue: When a recent grad dies, who should fulfill his or her debts?

How Private Loans Differ From Public

Before we continue, a refresher: Student loans made by federal lenders are considered public loans, and those made by private companies are private loans. In general, public loans have lower, locked-in interest rates, as well as special programs for unemployed or low-income borrowers or people who work in public service. In contrast, private loans have variable interest rates that are subject to increase, which makes them harder to pay off. Because of their reliability, public loans are considered a relatively safer choice, but their availability is limited.

RELATED: Real Women Speak Out: How Student Loans Affected Me

In fact, it is sometimes suggested that those who hold private loans—especially those who took out the loans with guarantors or co-signers—also take out a term life insurance policy, with the guarantor as beneficiary, to repay that money if they die an untimely death. Private student loans act the same as any private loan upon the borrower’s passing—the borrower’s estate or the loan’s co-signer is responsible for repayment.

“When these people explained the student loans, they made it sound like the best thing since cornbread,” Smith told Diverse. “At no time did they say if this person is injured, disabled or in our son’s case, passes away, you will be responsible for this loan.”

RELATED: What to Do If You’re Struggling With Student Loan Payments

First Marblehead Corporation, on the other hand, refused to comment on Smith’s situation due to privacy laws. A spokesman for American Education Services, the loan servicer, said they were unable to offer forgiveness as they aren’t the original lender and they don’t own the loan.

Although there isn’t an epidemic of parents paying their deceased children’s private student loan debts—there are no statistics on how many students leave behind loans every year, or how many co-signing parents bite the bullet and pay those bills—those who have brought their cases to the media, via Change.org or another platform, are fighting to change the system.

  • http://twitter.com/CollegeGamePlan Todd Weaver

    While the number of families affected by these scenarios is low (thankfully), private lenders do not do enough to help families understand the terms and conditions of the loans that are being offered. I graduated from business school with a colleague who had over $100K in student loan debt. His parents had a $100K life insurance (term) policy on him “just in case” so that they would be protected in the event of a tragedy.
    I don’t sell financial products, but I always suggest families consider inexpensive term life insurance for the student if there might be financial hardship (on top of emotional hardship) should a student pass away.

  • http://twitter.com/MsMadamMoney Tarra Jackson

    Great information!

  • Carol

    What did these parents think it meant when they co-signed on the loan? If they co-signed, they SHOULD be held responsible. That’s how co-signing works. :-/