In the words of Ben Franklin, “In this world nothing can be said to be certain, except death and taxes” … and student loan debt, for about 40 million Americans.
Thinking about your eventual death is not so fun, but unfortunately, we’ll all meet the same fate some day. But if you have student loans and you pass away, it’s important to know if your debt could be passed on to someone else.
Do Student Loans Die With You?
Here’s what you should know about what happens to student loans when you die.
If you have federal loans…
If you only have federal student loans, there’s good news. According to student loan lawyer Jay S. Fleischman, “Federal student loans are discharged when the borrower dies.” That means if you die with federal student loan debt, you won’t have to worry about it being passed on to anyone else.
Parent PLUS borrowers are also eligible for a death discharge. Fleischman added that for Parent Plus loans, it’s the parent — not the student — who is legally obligated to repay the loan. “These loans can be discharged when either the parent or the student dies. Discharged federal student loan obligations won’t pass to your estate, and your heirs won’t have to pay them off,” he said.
In order for your loans to be discharged, a family member or estate representative? must present a certified death certificate to the school (for borrowers with Perkins Loans) or to the loan servicer (for borrowers with a Direct Loan or FFEL program loan).
However, there is one important thing to note about Parent PLUS loans. If the loan was discharged due to the student’s death, parents will receive a 1099-C form from the IRS. This form shows the amount of remaining debt that was cancelled and is treated as taxable income. Parents in this situation may be hit with a large tax bill.
If you have private loans…
Things get a bit trickier when it comes to student loans from private lenders. Some private student loan lenders do offer a death discharge, but not all of them.
According to Edvisors, an online resource for paying for college, “Some lenders of private (non-federal) student loans offer a death discharge if the borrower dies. These include Sallie Mae, New York’s Higher Education Services Corporation, Wells Fargo and Discover.” Other lenders may go after the remaining balance from your estate.
If your private student loan has a cosigner, which many of them do, you may be headed toward trouble. Your cosigner is legally responsible for your debt after you pass away, regardless of the types of loans in question. Plus, the full balance will likely be due immediately.
Heather Jarvis, a student loan expert, stated that for private loans, “the death of the borrower or the cosigner can trigger default. That means the entire balance becomes due immediately, even if the surviving signer has always made payments on time.”
So, if dealing with the loss of a loved one isn’t hard enough, getting a bill for your total amount could add salt to the wound. For one family, it meant harassment on top of the already painful grieving process.
According to an article on ProPublica, Francisco Reynoso co-signed for his son’s private student loans. After the death of his son, he was hounded by debt collectors looking to obtain the remaining balance.
His son died in a tragic accident and Reynoso found himself unable to pay the bill, serving as the family’s sole breadwinner.
So what are you to do if you have cosigned student loans? In order to avoid situations like this, look into cosigner release. Typically, lenders will require you to make on-time payments for a specified period of time and illustrate that you are financially capable of handling payments on your own.
In addition, parent cosigners who could end up liable for private student loans can look into getting a life insurance policy for their child. In the event of death, parents would receive a sum of money to help cover costs.
If you go this route, be sure to purchase a life insurance policy that will cover the cost of any outstanding debt. For example, if you’d be on the hook for $50,000, then get a life insurance policy for at least that amount or more.
If you are married…
If you die, your spouse could be liable for your student loans.
If you acquired student loan debt during the marriage and live in one of the nine community property states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin — your spouse may be liable for your student loans after you die.
This is usually not the case if you took out your student loans before marriage, however. In this case, your spouse would be on the hook only if they were also a co-signer.
What should you do?
The answer to what happens to student loans when you die isn’t a straightforward answer — it depends on the types of loans you have, the state you live in, if you have a cosigner, and more.
The best thing you can do to make sure you and your family are protected by understanding your lender’s policy regarding death discharge and reviewing in depth. In addition, look into cosigner release and a life insurance policy that could help with any outstanding debt. Preparing now can save your family from financial trouble down the line.
Lastly, if you or someone you know is in a crisis, whether or not you are thinking about killing yourself, please call the National Suicide Prevention Lifeline at 1-800-273-TALK (8255).
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