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Don’t Count on Your Parents to Bail You Out of Student Loans

In the 1990s, Wendi LaBorde took out student loans totaling about $75,000, but she could not repay those loans. Over time, interest accrued on the debt.

In 2010, the Department of Education obtained a judgment against Ms. LaBorde for approximately $395,000–five times what she borrowed.

In 2014, LeBorde received the proceeds from her late mother’s life insurance–$485,902, which was enough money to pay off the judgment on her student debt.

LaBorde didn’t use the insurance money to pay off her student loans. Instead, she created a trust that named Connie Christine LeBorde, her daughter, the beneficiary. The trust bought a condo in California and then sold the condo and purchased a home in Riverside County, California, for $403,000.

In 2020, the federal government sued LaBorde, accusing her of making a fraudulent transfer to avoid paying the judgment against her for her unpaid student loans. The feds pointed out that LaBorde’s daughter, the trust beneficiary, lived in Arkansas and LaBorde lived in the Riverside County house.

A federal court agreed with the federal government. Late last month, the court ruled that Laborde’s transfer of life insurance money to the trust was fraudulent. It ordered that LaBorde be named the owner of the Riverside County house, making it subject to the government’s lien for $437,000–the amount of her unpaid student loans plus accrued interest.

What happens next? The federal government will enforce its lien on the California home where LaBorde was living. Ultimately, the house will probably be sold, and most of the proceeds will go to Uncle Sam.

Millions of Americans are burdened by college loans they can’t repay. Many have given up even trying to pay off their student debt. Meanwhile, interest continues to accrue. It is not uncommon for people to owe three, four, or even five times the amount of their student loans due to penalties and accrued interest.

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Undoubtedly, many of these debtors are counting on an inheritance from their parents or life insurance benefits to bail them out. Perhaps they intend to use inheritance money or life insurance proceeds to help prepare for retirement or purchase a modest home.

Unfortunately, as the LaBorde decision demonstrates, the feds can claim life insurance proceeds to satisfy a judgment for unpaid student loans. Moreover, the same logic that applies to life insurance may also apply to inheritances. At least one court has held that a student-loan debtor was not entitled to discharge student loans in bankruptcy because she did not use inheritance money to help pay off her student loans.

In retrospect, Ms. LaBorde’s mother would have been wise to have made her granddaughter, Connie Christine LeBorde, the beneficiary of her life insurance policy. Connie could then have used the insurance proceeds to purchase a house and rent it to her mother at a modest price. Structuring the transaction in that way would have avoided an allegation of fraud.

In my view, the LaBorde decision is unfortunate. I do not believe student-loan defaulters should be deprived of their inheritances or life insurance proceeds for the sole reason that they were unable to repay their student loans.

Richard Fossey is a professor at the University of Louisiana in Lafayette, Louisiana. He received his law degree from the University of Texas and his doctorate from Harvard Graduate School of Education. He is editor of Catholic Southwest, A Journal of History and Culture.

4 thoughts on “Don’t Count on Your Parents to Bail You Out of Student Loans”

  1. Hi, Steve.

    After commenting on your site about Wendi LeBorde’s situation, I corresponded with her by email. She granted me permission to post my comments to her on your site. Here goes:

    Dear Wendi:

    What happened to you is a new development as far as I can determine. The government can sweep up income-tax refunds and garnish Social Security checks without getting a judgment. It can just do those things. But to take away a home it must have a judgment against you.

    Had the government not gotten that judgment against you, it probably would have agreed to put you in an income-based repayment plan (IBRP), which would have required you to make a modest monthly payment for 25 years. But apparently, after it got that judgment, the feds weren’t interested in offering you an IBRP.

    A skilled lawyer might have prevailed against Uncle Sam, but maybe not. In any event, most distressed debtors can’t afford a lawyer. The federal judges aren’t familiar with the student loan crisis and tend to accept the government’s arguments if there is not a competent attorney to represent the debtor.

    And, as your case illustrates, the government has unlimited resources for harassing student debtors. I’m not surprised that a lawyer flew halfway across the country for your debtor’s exam. And I think four debtor’s exams are nothing short of harassment.

    Did you attend a for-profit college? If so, I think it is highly likely that you paid too much for your education. But I understand that you got your Ph.D. and are practicing your profession, which is a noble accomplishment.

    There is no question in my mind that you were treated unfairly, but without an energetic and competent lawyer, most student-loan debtors have no defense against this kind of legal brutality.

    Richard Fossey

    Reply
  2. Thank you for your commentary on my situation. Do you think there are any political figures who would agree with you, thus stop the government from taking the home, because the situation… the behavior of Uncle Sam is soooo egregious ? I have been voluntarily making routine payments on these loans for the past seven years. They have never agreed to put a payment plan in place for me, though I have begged for one at every debtor exam. They have been completely unwilling to engage in any sort of reasonable compromise or settlement. The politicians really need to do something about the way student loan debtors are treated in this country. We need help. Uncle Sam is being allowed to destroy our lives. It isn’t fair- it’s not American. The undue hardship this situation creates is unfathomable. The same government who cuts my profession’s reimbursement rates at work continues to charge high fees/interest on student loan debt. There is no possible way to pay them off with your income. The government is creating homelessness for good hard-working people.

    Hi. Thank you for answering my question. I just wanted to clarify a few points for you.
    1. I represented myself in court because I could not afford an attorney. The ones I interviewed requested insane amounts of money such as a $37,000 deposit and $400 hourly rates. I had no choice but to represent myself. 2. The court refused my offer to settle for $37,000 and never again at any Debtor Exam would agree to go into any sort of payment arrangement with me. In 2017 I began sending them $200 a month on a voluntary basis and have done so ever since. 3. I formed the Trust for my daughter, as I was the Executrix of my mother’s Will and the final page of it asked me to do just that. My daughter did not live in the house full-time because she was away in college at the University of Arkansas.

    Can you add to your response the fact for the readers that the government completely ignored multiple laws on the books to sue me and steal my mother’s life insurance? For example, they violated the Louisiana law that protects life insurance funds from any creditors. They also never properly served me in the lawsuit. They vehemently tortured me over this during the Cares Act. They ignored statute of limitation rules, etc. What readers need to know is that the government follows no laws and can do any thing they want to you. There’s no one over them to keep them in check . The court documents contain horrible lies about me. If I had the money, I would sue them for slander and harassment. They have tried me for the same issue over and over and over again, never once offering a reasonable payment plan solution. Their private contractor attorney, Shannon Brown, flew to San Diego on Labor Day weekend to put me through my fourth Debtor Exam, probably only so she could enjoy a free vacation on the tax payer’s dollar. This is a very broken system. I I am absolutely a victim of student loan mismanagement. My loans were bought and sold many times behind my back. They did not contact me for over a decade. They offered me no resolution plans. I should have joined one of the class action suit against them years ago. The government has had NO interest in helping me or working out any sort of reasonable resolution to this nightmare. They have only demonstrated greed and a joy in torturing me and my family. This is how I am treated for getting a PhD and helping disabled military Veterans for a living in this country. Shout from the mountain tops to everyone: NEVER go to graduate school if you have to take out a student loan and never get in bed with the government for any reason. If you do, they will hold you hostage until the day you die.

    Reply
    • I added your additional reader question statements to your comment here so all could hear what you had to say. Adding additional information in the comments is the best way to get additional information out.

      Reply

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