Can a parent's student loans screw up their kid's life?

[Duchess of Stratosphear]

I did a quick Google on this with meh results, but I thought someone on this forum would be sure to know.....

I have a friend who has pretty major student loan debt. Will her kid someday be responsible for that debt if it's never fully paid? She just bought a life insurance policy in case something happens to her and she mentioned that she found out that her kid would be responsible for her sizable student loan debt. Can that be right? Would the insurance policy be considered part of her estate if she died, even if the child was the beneficiary and would the loans therefore have to be repaid out of that? I was always under the impression that debt wasn't inheritable, except that it could reduce the size of an estate.

I hope this questions makes sense. Can anyone provide some insight? Is there a best way to provide for a child to protect them from a parent's debt?

[xenon5]

No, you can't inherit someone else's debt from parent to child.    However, if she cosigned the loan with her child, then yes, the child would be responsible for the loan after her death. 

For a personal loan, it would be repaid with her estate.  The proceeds of the life insurance would pass directly to the child, so the lender doesn't get any of it.
http://wills.about.com/od/howtoavoidprobate/a/insurancebills.htm

If there isn't enough money in the estate to pay off the loan, the lender writes off the difference.

[Duchess of Stratosphear]

Thanks guys! My friend is one of the smartest people I know, yet she's one of the worst with money and money issues, which is so weird. So I thought that she must be misunderstanding something, and xenon's info supports what I thought. Thanks for responding to such a vague question. If there are more details, I may bug you again. Cathy, at this point, I don't think there will be much in terms of an estate to inherit, so it's good to know that life insurance wouldn't be called upon to pay the bills.

This does make me think of another question: I'm trying to get my friend to consider a Roth or a 529--if her daughter were the beneficiary of those, would the same rules apply or would they have to be used to pay back the student loan debt (which is substantial)? I guess the 529 would have to have the kid's name on it since it would be used to pay for her college, right? So would it be safe? What about the Roth with her as the beneficiary? Any ideas?

[Gin1984]

Thanks guys! My friend is one of the smartest people I know, yet she's one of the worst with money and money issues, which is so weird. So I thought that she must be misunderstanding something, and xenon's info supports what I thought. Thanks for responding to such a vague question. If there are more details, I may bug you again. Cathy, at this point, I don't think there will be much in terms of an estate to inherit, so it's good to know that life insurance wouldn't be called upon to pay the bills.

This does make me think of another question: I'm trying to get my friend to consider a Roth or a 529--if her daughter were the beneficiary of those, would the same rules apply or would they have to be used to pay back the student loan debt (which is substantial)? I guess the 529 would have to have the kid's name on it since it would be used to pay for her college, right? So would it be safe? What about the Roth with her as the beneficiary? Any ideas?

No the 529 would be in your friend's name with child as beneficiary so the creditors can still go after it.  However, you can make a Roth have direct beneficiary, and have not go in the estate which I believe would mean, no the student loan companies cannot go after it.

[Duchess of Stratosphear]

Hmmm, so a 529 can't be just in the child's name, even though that's who is supposed to use it for education costs? Interesting.

Thanks again y'all.

[LadyStache]

Hmmm, so a 529 can't be just in the child's name, even though that's who is supposed to use it for education costs? Interesting.

Thanks again y'all.

It could be in the child's name, but that's usually not recommended because assets in the child's name are more negatively assessed on the FAFSA. Usually 529s are in the parent's name with the child listed as the beneficiary.