College Loan Debt... Even After Death

It took six years and nearly 80,000 signatures on an online petition to persuade KeyBank (NYSE: KEY) to forgive the student loan debt of a deceased student.

Christopher Bryski was injured in a recreational accident in 2004 when he was a junior at Rutgers University. After two years in a comatose state, Bryski died with about $50,000 in student loan debt. His father had co-signed for those loans.

After years of unsucessful negotiations over the debt, the brother of the victim launched an online petition drive to protest KeyBank's policies. Within days, the family had collected thousands of signatures, and KeyBank officials agreed to discharge the balance of the Bryski family's loans. The bank will also review its policy as it relates to families in similar situations.

In his petition, the victim's brother, Ryan, noted that loans guaranteed by the federal government are automatically discharged on proof of death. In addition, other major private student lenders forgive outstanding student loan debt if the borrower dies, including some or all of the loans issued by Wells Fargo (NYSE: WFC), Sallie Mae (Nasdaq: SLM), Discover Financial Services (NYSE: DFS), and Citibank through its former subsidiary, Student Loan Corp. Discover acquired the Student Loan Corporation from Citibank in late 2010.

While it's reassuring that some lenders will discharge the debt of a deceased borrower, don't jump to any conclusions about them. Just today, Justin Kuehn, who is paying off four student loans, filed a class action lawsuit alleging the same three -- Citibank, Discover Bank, and Student Loan Corp. -- "are engaged in a scheme to collect additional interest at the expense of borrowers of student loans."

There are a lot of issues with student loans. In fact, they're an education in themselves.

If you haven't experienced the frustrating realties of college financing recently, the first thing to understand is that there are basically two kinds of loans. The best options are loans issued by the federal government, the ones that have been the subject of interest rate hike debates recently. These loans, both subsidized and unsubsidized, are issued directly to the school in the name of the student. They don't require a co-signer, although the loans come with the warning that feds can and will take future income tax refunds and probably everything else the student owns in the event of a loan default.

But the maximum loan is $5,500 per year for freshman undergraduate students, $6,500 for sophomore undergraduates, and $7,500 per year for junior and senior undergraduate students, as well as students enrolled in teacher certification or preparatory coursework for graduate programs. But even if a student attends a public institution in his home state, he would have paid an average of $21,447 to study and live on campus this year, the College Board estimated last fall. So there can be a big gap between federal financial aid and total costs, even for the poorest students who also qualify for several thousand dollars in grants.

For most students, the dilemma is bridging the gap between the federal aid offered by the school and the cost of attendance. Some may rely on wealthy parents or rich relatives, and other parents may be comfortable obtaining federally issued Parent Plus loans. But a Parent Plus loan is solely on the backs of the parents: The student is not legally obligated to make any payments on the loan.

Parents that can't or won't incur that debt will likely suggest the student explore alternative or private loans. But here is what many novice borrowers -- and their parents -- may not know.

Most private loans require the borrower to have a co-signer. So unless the student has a minimum of $20,000 a year in income, a good credit history, and is at least 18 at the time of the application, there is no way the loan will be approved unless a parent or another credit worthy borrower agrees to co-sign the loan.

And that raises multiple questions for the co-signer, from "What happens if the worst happens and the student dies?" to "How long will I be on the hook for this student loan debt?" In the past, lenders would typically allow the borrower to apply for a release of co-signer after making a year or two of post-graduation on-time payments.

But the rules are getting tighter. Discover doesn't allow the co-signer to be released from a student loan, and since this past February, neither does Discover-owned Citi Student Loans. Many other major lenders do still allow the co-signer to be released. But many have made it harder to get the co-signer off the loan: They may require three or four years of on-time payments, rather than just a year or two.

(Tomorrow: a list of student loan co-signer release policies.)