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

When a Recent Grad Dies, Who Should Pay the 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.

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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.

When Does the Government Step In?

The 2006 case of Christopher Bryski—another young man whose family was accountable for his $50,000 in loans after his passing—sparked the introduction of some of the first legislation to address whether private loans should be forgiven in the case of death. Six years and 80,000 Change.org signatures later, his remaining debts were discharged, but not before the Christopher Bryski Student Loan Protection Act was introduced in the House of Representatives in 2010. The bill—which would require private lenders to clearly explain the responsibilities of co-signers in the event of death or disability—was passed in the House unanimously, but it didn't make it to a vote in the Senate before the Congressional session ended. The family is hoping to get it reintroduced this year.

While it won't guarantee a graduate won't leave his debt to his parents, making sure both the borrower and his family are fully aware of the loan's stipulations might lead him to borrow less and, in the event of a tragedy, leave a smaller sum behind.

Another act could make a difference too—the Fair Debt Collection Practices Act (FDCPA) of 1996, which prohibits abusive debt-collection practices. In July of 2011, the Federal Trade Commission strengthened the act with guidelines that explicitly prohibit lenders from pursuing a deceased lender's relatives for payment if those relatives don't have a legal obligation to pay (they aren't co-signers). However, neither the act nor the regulations protect a surviving co-signer from having to fulfill remaining debt.

Finally, the Know Before You Owe Act could ensure students and their families are more knowledgeable when they take out loans. Aimed at getting full disclosure from lenders and fairer deals for borrowers, the bill would require private lenders to obtain proof of a borrower's acceptance to college, to verify that he or she has been fully informed of financing options, and to provide quarterly updates to the borrower on the balance, interest rate and the amount of accrued but unpaid interest on the loan. While this certification process can't guarantee a perfect system, it has been found to reduce the amount borrowed and decrease the default rate.

RELATED: Understanding Student Loans 101

So, Who Should Pay?

After discussing the enormity of student loan debt and the legislation in place to address it, we're left with our original question: Who should fulfill a deceased graduate's private loans?

The answer, of course, depends on whom you ask. Private lenders expect to be paid back, no matter who makes the payments, while bereaved families feel like student loans should be the last thing on their minds. So the question changes from "Who should pay?" to "How can I keep myself and my family out of this situation?"

RELATED: The Student Loan Crisis: By the Numbers

First and foremost, know that taking out private loans is serious business—if you sign on the dotted line (or click  "accept") without reading the agreement, you could be blindsided by future costs. So: Read your agreement before signing. Ask questions if you have them. Start planning how and when you'll pay when you pick up that pen. If trouble does strike, most private lenders say that they offer a review of your policy, so make sure to ask about that upfront and inform your beneficiaries whether a review is an option.

If you a) have considerable private loans and b) don't think your parents or spouse would be able to cover the cost were something to happen, you might want to look into life insurance. According to Bankrate.com, a $100,000 term policy can be had for as little as $10 a month.

And finally, make sure you know who is responsible for paying your loans should circumstances prevent you from paying—and make sure that person is aware as well. As we see through these stories, the only thing worse than debt is debt you don't see coming.

Legally, private lenders can only pursue co-signers on a loan. If you are a parent, but not a co-signer or guarantor, any lenders asking you to pay the remaining loans do not have legal recourse. If you believe you are being pursued in error, register your case with the Consumer Financial Protection Bureau or Federal Trade Commission. If you are a co-signer and are indeed liable for those loans, consider consulting a lawyer. To encourage Congress to pass the Christopher Bryski Act, follow the directions provided here.

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