Marcia DeOliveira-Longinetti went through a nightmare most parents hope to never even imagine. As reported by The New York Times, an unknown assailant killed DeOliveira-Longinetti’s son in 2015.
To add to her pain and turmoil, she found out she was responsible for paying his student loan balance even though he was dead — she had cosigned her son’s student loans from a New Jersey state agency.
DeOliveira-Longinetti asked the state agency to forgive the balance, but they refused her request. She was forced to continue making monthly payments as she grieved over her murdered child. Her case brought much-needed attention to this terrible issue. Now, lawmakers are taking action.
Unanimous approval for a new bill
On October 20th, the New Jersey State Senate approved a bill that would require the state agency responsible for student loans to forgive the debt of the deceased or those who become permanently disabled.
Lawmakers unanimously approved the bill with a 34-0 vote. Next, it goes to the desk of Governor Chris Christie for either his signature or veto. He has 45 days to make a decision. If he does sign the bill, it will go into effect immediately, providing instant relief to families.
The new bill would stop the state agency from going after families who have lost loved ones with student loan debt. If Governor Christie does sign the bill into law, the state would forgive about 70 loans a year, at a cost of $1.5 million.
When family is responsible for student loan debt after death
While the New Jersey legislation has brought attention to this issue, it’s not a new or novel development. Many families nationwide have gone through the pain of continuing to make student loan payments on behalf of a deceased or disabled relative.
Whether or not lenders discharge a loan depends on the type of loan and if there was a cosigner.
If you have federal student loans, the government discharges the debt after they receive proof of death, such as a death certificate. For Parent PLUS loans, the lender forgives the debt if a parent dies or if the student the loan benefitted passes away.
When it comes to private student loans, whether or not families owe the balance of the debt after the death of the borrower depends on the individual lender. Some offer discharge policies even if the loan had a cosigner, but not all do.
For example, Sallie May has policies that forgive loans if a borrower dies, but National Collegiate Trust does not. Private lenders are under no obligation to forgive student loans after death. If you are a cosigner, you could be held responsible for the debt after the death of the borrower.
Additionally, in community property states, spouses of deceased borrowers could still responsible for the loans, even if they were not a cosigner. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
There have been attempts to petition private lenders to change their policies, but many lenders have not updated their procedures. For now, the only option family members have with these companies is to call them and ask for an amended plan. Some lenders will at least reduce the interest rate, overall balance, or monthly payment.
In the case where lenders do forgive student loans due to death, there can still be tax implications. The IRS considers most forms of discharged debt, including student loans, as taxable income. So if a lender discharges the loans of the deceased, the family may be hit by a large tax bill.
The Department of the Treasury specifically states in the Higher Education Act of 1965 that student loans forgiven due to death or disability are taxable.
In September 2016, Congressman Peter Roskam sponsored a bill that would amend the Higher Education Act to provide an exception for deceased or disabled borrowers. The bill would exclude the family members from paying income tax on the discharged student loan balance.
Student loan reform
The student loan system, both federal and private, has been under intense scrutiny from the public and politicians recently. Rising balances, predatory practices, and hardships after families face tragedies have caused many to call for reform to the current systems.
The New Jersey bill is still in progress and awaiting Governor Christie’s decision. But the unanimous vote from the State Senate is just the latest sign of major change throughout the country on student loans.
As student loans continue to evolve, it’s important to do your due diligence before taking out debt. Since the government discharges all federal loans in the case of death or disability, exhaust your federal loan options before turning to private loans. If you need a private loan to fill the gap for your education, check their policies before signing.
No one wants to consider their own mortality, but thinking ahead can save your family from substantial heartbreak and financial hardship.
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