When your child takes out student loans to pursue a degree, you don’t expect that they might one day become so sick that they’re unable to pay them back.
But this worst-case scenario does happen, and often it’s parents who are left picking up the pieces and wondering how to tackle their child’s student debt. If your child is experiencing a major hardship or permanent disability and can’t repay their student loans, here are your options.
Understanding power of attorney
To handle your child’s debt on their behalf, in most cases you’ll need to establish power of attorney.
“Laws designed to protect our confidential information prevent financial institutions from working with anyone who is not a joint owner on an account or jointly liable for a debt,” said Tricia Dunlap, principal at Dunlap Law. “Because of these laws, a power of attorney is essential.”
“A power of attorney empowers one person — known as the ‘agent’ or ‘attorney in fact’ — to step into the shoes of another person and act as if they were that person,” she added.
The power of attorney doesn’t have to be all-encompassing. It can be limited to your child’s finances and remain inactive until certain conditions are met. Known as a contingent power of attorney, you wouldn’t be able to step in unless your child is unable to manage their affairs themselves, because of issues such as a debilitating illness or if your child becomes a missing person.
“If the child becomes incompetent, then the power of attorney would come into effect and the parent would be empowered,” said Dunlap. “If the child stays healthy and competent — and never becomes incompetent — then the power of attorney would stay dormant.”
Because power of attorney laws vary by state, Dunlap recommends finding a local attorney who can help you and your child draft a document.
What if you don’t have a power of attorney in place?
Many student loan lenders, including Sallie Mae and Navient, allow your child to fill out a third-party authorization form to release information about the loan to whoever is named on the form.
If your child has done this work in advance, it could make it possible for you to view their student loan information without a power of attorney.
If no prior plans were made, it could still be possible to obtain legal authorization to manage your child’s student loans by going in front of a judge. A qualified student loan lawyer can walk you through this process.
Deferment during illnesses that aren’t permanent
If your child has federal student loans and is temporarily unable to make payments, they can apply for a hardship deferment. Some private lenders may also offer a similar program.
“For nonpermanent illnesses, deferment allows a temporary ‘pause’ on payments,” said Alicia Klein, a senior adviser at Cambridge Financial Group. This option could allow your child to put off payment for up to three years, although interest will likely continue to accrue depending on the kind of loan your child has.
“I would immediately recommend doing the deferement so they don’t go into default on the loan,” said Klein. This applies even if you’re not sure how long your child’s illness might last. “Then, as the prognosis becomes clear, they can make a decision at that point,” she added.
To qualify for federal student loan deferment, your child needs to meet the federal eligibility criteria. If you have private student loans, discuss your deferment options with your lender.
Disability discharge could help if the disability is permanent
If your child is permanently disabled and has federal student loans, it’s possible the government will forgive the debt.
“For permanent disabilities, you may qualify for complete forgiveness,” Klein said. “The process for loan forgiveness is more complex than deferment, but if your application is accepted, your balance for all federal loans is reduced to zero.”
Disability discharges are available for Direct Loans, Federal Perkins Loans, Federal Family Education Loans, and Teacher Education Assistance for College and Higher Education Grants. To receive a disability discharge, your child will have to prove that they are permanently and totally disabled. There are three ways to prove this:
Your child is a veteran with a documented service-related disability.
Your child is receiving Social Security Disability Insurance or Supplemental Security Income.
Your child’s physician submits documentation that they are permanently disabled and that the disability will likely result in death, has continued for more than five years, or can be expected to last for more than five years.
If your child is approved for a disability discharge, there may be a three-year review period where any changes in income and status will be monitored. Your child may also be required to pay income tax on the discharged amount.
For more information about permanent disability discharge and to learn how to apply, visit the Federal Student Aid site.
What about private student loans?
When it comes to private student loans, the policies vary from lender to lender. Private lenders such as Sallie Mae, College Ave, and Ascent will completely waive the remaining balance of a loan in the case of permanent disability, but some other lenders don’t have information clearly listed on their websites.
“I would still recommend that [borrowers] contact the lender immediately to at least notify them of the situation and see what the next best course of action is,” said Klein. “The banks want to get paid for the loans, but it’s better to work with a lender than to just completely forget them.”
No parent wants to think about their child falling seriously ill, but sometimes the unthinkable happens. Plan for such scenarios if you can.
But if the worst has already happened, you can help your child through this tough time. Take the process step by step, and consult with a student loan lawyer if necessary.
Need a student loan?Here are our top student loan lenders of 2018!
|1 Important Disclosures for CollegeAve.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
2 Important Disclosures for Discover.
3 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB) or Turnstile Capital Management, LLC (TCM), which are not affiliated entities. Certain restrictions and limitations may apply. Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. All loan products may not be available in certain jurisdictions. Other terms and conditions apply. Ascent is a federally registered trademark of TCM and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
* Application times vary depending on the applicants ability to supply the necessary information for submission.
* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers.
4 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
5 Important Disclosures for PNC.
PNC Bank is one of the nation’s largest education loan providers. For over 40 years, PNC has been committed to helping students and their families make possible the adventure of college.
6 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
SunTrust Bank, Member FDIC. ©2018 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
7 Important Disclosures for LendKey.
Additional terms and conditions apply. For more details see LendKey
8 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
9 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|3.69% – 10.94%1||Undergraduate, Graduate, and Parents||Visit CollegeAve|
|3.97% – 12.97%3||Undergraduate and Graduate||Visit Ascent|
|4.34% – 12.99%2||Undergraduate and Graduate||Visit Discover|
|4.12% – 10.98%*,4||Undergraduate and Graduate||Visit SallieMae|
|5.03% – 11.23%5||Undergraduate and Graduate||Visit PNC|
|4.00% – 13.00%6||Undergraduate and Graduate||Visit SunTrust|
|4.72% – 9.81%7||Undergraduate and Graduate||Visit LendKey|
|3.72% – 9.68%8||Undergraduate, Graduate, and Parents||Visit CommonBond|
|4.19% – 12.06%9||Undergraduate, Graduate, and Parents||Visit Citizens|