Thinking about your student loans isn’t fun and thinking of your death is even less fun.It’s something that happens to everyone, we promise. But it’s something you need to plan for, especially if you’re one of the 44 million Americans with Student Loan debt. You may want to find out what happens to your student loans when you die and if your debt could be passed on to someone else.
Here are some answers for you.
Whether or not your student loans pass on to someone else when you pass depends on the type of loans you have.
Take the time to figure out where you stand with your student loan debt so you can lower the chance that your loved ones end up bearing the brunt of your debt.
When it comes to Federal Student Loans, the news is pretty good.
If you die with federal student loan debt, you won’t have to worry about it being passed on to anyone else. Once you pass on, the federal student debts in your name are discharged or forgiven. To receive this discharge, your loved ones need to present a certified death certificate to the loan servicer. Once they do, it will be verified and the loan will be discharged.
Parent PLUS borrowers are eligible for a death discharge because PLUS loans are federal loans.
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,” he explained. “Discharged federal student loan obligations won’t pass to your estate, and your heirs won’t have to pay them off.”
There are however tax consequences associated with the death discharge of a Parent PLUS loan due to the student’s death. Parents receive a 1099-C form from the IRS after the debt is canceled. The remaining debt canceled is treated as taxable income. So parents in this situation could be hit with a large tax bill.
If you have private student loans, things get trickier. Some private student loan lenders do offer a death discharge, but not all of them. Make sure to contact your loan provider to see what options they have.
Private student loans, including refinanced loans, are more like traditional personal loans. Just like other types of debt, private lenders might come for your estate when you die. However, if the loans are only in your name, your children or other relatives aren’t generally considered liable, according to Credit.com.
If your private student loan has a cosigner, though, a lot of them do, you might be in trouble. Your co-signer is legally responsible for your debt after you pass away, regardless of the type of loan in question. And, in some cases, cosigned debt repayment can be accelerated.
“The death of the borrower or the cosigner can trigger default,” explained Heather Jarvis, a student loan expert. “That means the entire balance becomes due immediately, even if the surviving signer has always made payments on time.”
So what can you do if you have co-signed student loans? Look into a co-signer release.
Typically, lenders require you to make on-time payments for a specified period of time and showing that you’re financially capable of handling payments on your own. Once you’ve done this, you can obtain co-signer release. However, not all lenders offer this option.
In some cases, a very popular option for parent co-signers is to purchase a life insurance policy for their child. In the event of death, parents would receive a sum of money to help cover the repayment of co-signed student loans.
If you go this route, look into a life insurance policy that covers 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.
If you acquired student loan debt through marriage and live in one of the nine community property states
Your spouse could be liable for your student loans after you die. It’s 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 are also a co-signer.
The answer to what happens to student loans when you die isn’t a straightforward one. It depends on the types of loans you have, the state you live in, if you have a cosigner, and a ton of other factors.
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 it in depth. Use the National Student Loan Data System (NSLDS) to figure out who your servicers are and contact them to find out their policies.
Also make sure to look into co-signer release and a life insurance policy that could help with the remaining outstanding debt. You can also consider federal loan consolidation or student loan refinancing to simplify your payments and gather all your loans in one place.
Preparing now can save your family from financial trouble down the line.
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