There has been a significant increase in student loan debt as well as default rates by borrowers leading to an increased risk that the estate a borrower’s parent intends to pass to their child could instead end up in the hands of a student loan lender or collection agency. If your child has significant student loan debt, difficulty repaying their student loan debt, or if you just want to minimize the chance your estate could end up in the wrong pocket, then you should continue reading below to understand how you can protect your child and your assets from these creditors.
Understanding the Scope of the Student Loan Problem
There is over $1.45 TRILLION dollars in student loan debt outstanding in the United States today. That is over 600 million more than outstanding credit card debt. Outstanding student loan debt has increased over 170% since 2006! Even more alarming – according to the New York Federal Reserve, borrowers are making less progress in paying down those student loans even as the amount of student loans issued continues to increase. Over 42 million Americans now have student loan debt.
This is a recipe for disaster. Delinquency rates on student loans are in excess of 11% (meaning loans more than 90 days past due). Default rates are much higher. The New York Federal Reserve has done significant research over the past year on default rates and some of the results are stunning. According to the New York Federal Reserve, over 35% of students attending for-profit private colleges have defaulted on their student loans by the age of 33.
Some parents might have children that attended community college and think that defaulting on student loans is a problem that is unique to 4 year universities or private for-profit universities. It’s true, borrowers attending private for-profit colleges have historically seen some of the highest default rates. However, borrowers attending public 2 year colleges (think community colleges) have seen the greatest statistical increase in default rates with borrowers defaulting at rates almost as high as private for-profit colleges.
The impact on the lives of these borrowers is dramatic. Student loans are one of the few debts that can NOT be discharged in bankruptcy. This leaves student loan borrowers with little hope of escaping the debt without paying it. The burden of repaying these loans means that student loan borrowers are less likely to own homes and save for retirement.
Private lenders aggressively pursue collection of delinquent borrowers through collection agencies, law suits, and garnishments (in some states). If students default on federal loans, then the government has even greater powers to collect on the loans including garnishing the borrower’s social security payments which impacts the borrower’s ability to provide for his or her self during retirement. When borrowers default, they incur penalties and interest that cause the outstanding debt amount to increase significantly over time.
How Your Child’s Student Loans Affect Your Estate
If you have a child with student loan debt, have you talked to them about the status of their loans? Are they able to repay them? Have they defaulted on their loans? Would they be honest in telling you about their troubles if they had them? What if they run into financial trouble after you have already passed away?
These are difficult conversations that parents often do not have with their children. But they need to.
Remember – these loans are not dischargeable in bankruptcy and lenders are quite aggressive in collecting these debts.
This means that if you leave any assets to your child, and that child defaults on a student loan, then those assets become subject to a lender’s collection efforts. Your child may not inherit anything until 10, 15 , or even 20 + years after he or she defaulted on their student loans. But those debts did not go away. They just kept growing and accruing penalties, interest, and likely court costs as well as attorneys fees.
A collection agency cannot attach, execute, or garnish the assets of your child. Collection agencies operate through coercion and guilt. But the original creditor, or in some cases a collection agency that purchased the loans, can go to court and secure a judgment. Any attorneys fees and court costs the creditor incurs in trying to collect the outstanding loan balance are added to the judgment and accrue interest as well.
At this point, the creditor has much more significant collection powers including the power to execute a judgment by confiscating assets or potential garnishing bank accounts. Judgment creditors may, in certain circumstances, have a receiver appointed pursuant to a turnover order to help collect on that judgment.
The net result is this – that estate you worked so hard to grow and pass on to your child could be wiped out by your child’s student loan debt.
Using A Trust to Protect Your Child and Your Assets
What if I told you that there is a solution in Texas? That there is a way to allow your child the benefit of your estate without risking that the assets may be taken by a creditor. Well, there is. It’s through the use of a trust. Trusts are not just an estate planning device for the super wealthy. Trusts can be used to make sure that your estate is passed on and used according to your wishes and not the wishes of a creditor.
The law is clear – you have the right to choose who receives your estate. More importantly, when you leave your assets in trust, you have the right to choose how, when, and for what purposes those assets may be used. You have the right to choose who will manage those assets. You have the right to prohibit their use to pay off the debts of a beneficiary. When that trust is properly formed and managed – your child’s creditors cannot touch the assets but your child can still benefit from use of those assets.
Establishing the trust and protecting its assets from a beneficiary’s (your child’s) creditors is highly technical. But it is perfectly legal. There are restrictions on who can put assets into the trust and rules for when and how assets are distributed. The language in the trust agreement is critical.
With a properly drafted and managed trust, your assets are protected for your child’s benefit. You child and your grandchildren can enjoy the use of the trust assets for such things as healthcare, health insurance, dental and eye care, housing, paying the bills, property taxes, paying educational expenses, as well as general maintenance and support. And your child’s creditors cannot take those assets. You can make sure your estate goes to supporting your child and his or her family instead of paying off a debt to a creditor.
If you would like more information about whether a trust is appropriate for your situation, then please complete the contact form below and someone form the Firm will contact you shortly.