Can Your Child’s Student Loan Debts Turn Your Estate Planning Upside Down?

As he approaches 60, Mason’s dreams of retirement have been shattered. He’s done the math, and he will have dependent children living under his roof until he is almost 70 years old.

A recent article from CNN Money shares the story of the man described here. He and his wife suffered the death of their 27-year-old daughter. After their death, they became guardians to her three children, who were all under the age of 10 at the time. On top of that, they’ve also been struggling with the repayment of her student loan debts.

When their daughter started nursing school, her parents had been cosigners on loans taken from private lenders. The loans amounted to $100,000; and when the creditors started going after them following their daughter’s death, they also needed to deal with late fees and steep interest rates. These troubles piled on the emotional devastation following their daughter’s death and the financial difficulties of supporting three grandchildren.

They have since managed to work out a more favorable repayment arrangement with some of the private lenders; but money is still a struggle, and they’ve needed to do away with their retirement plans. Their estate planning also requires a complete overhaul.

What to consider before becoming a cosigner

For one thing, you need to look at the loan forgiveness terms any time you become a cosigner. For student loans, for example, private lenders aren’t obligated to negotiate with you; they could demand all the money back. Even if your adult child is still alive, you may still be on the hook for the debts. For instance, if your child files for bankruptcy, creditors may go after you. This is especially true if your child files for Chapter 7 bankruptcy; Chapter 13 bankruptcy may offer you a stay from creditors, but it isn’t guaranteed.

Compared to private loans, a student loan from the government generally offers more favorable terms for forgiveness and repayment (especially in situations involving the death of you or your child). But it’s critical that you read the fine print and figure out how much of an obligation to repay the debts you’d face as a cosigner. For example, when it comes to student loans, who is listed as the legal borrower on the agreement – you or your child?

The same holds true for any loan where you’re a cosigner. Also, don’t forget situations where you’re a guarantor, backing someone up by agreeing to pay off a debt if the other person is unable to.

It’s crucial that you consider your status as a cosigner or guarantor when working on your estate planning. When you contact us, we can give you advice about protecting assets from creditors and also making financial decisions that are most likely to benefit you and your loved ones in the long run.