Death is never a welcome topic. With it comes a variety of financial responsibilities – one of those being student loans. Student loan debt impacts nearly every area of society. Reports indicate we have over $1.3 trillion in student loan debt, and that the average 2015 graduate leaves school with over $35,000 in loans. Additionally, more than 700,000 families over the age of 60 have a combined $18 billion in student loan debt. This begs the question of what happens to student loans after you die. Here's what to know about student loan debt after you pass away.
Do Student Loans Die with You?
The question of what happens to student loans after you die is unfortunately not a simple answer and varies from situation to situation.
In most cases, there are no worries when it comes to federal loans after death, as they can be discharged. "Federal education loans, including the Federal Stafford Loan, Federal Perkins Loan, Federal PLUS Loan and Federal Consolidation Loan, are canceled when the borrower dies. The canceled loans are not charged against the borrower's estate," says Mark Kantrowitz, Vice President of Strategy at Cappex.
If you're managing the estate of a loved one who passed with student loans, you simply need to provide a certified copy of a death certificate. This may need to be given to either the school or the loan provider, according to FederalStudentAid.Gov. It's best to contact the loan servicer to see what they require.
Parent PLUS Loans operate a little differently, depending on which individual passes away – the student or the parent. "In addition, the Federal Parent PLUS loan is discharged upon the death of the student on whose behalf the parent borrowed. If a Federal Parent PLUS loan is discharged because the student dies, the parent will receive a 1099C that treats the canceled debt as income to the parent, leading to a tax bill," adds Kantrowitz. This is likely the worst case scenario among public loans and must be taken into consideration when taking out a PLUS Loan.
Whereas public loans are relatively straightforward upon death, private loans can be much more problematic. In some cases, they can even become due in full upon passing – if there is a co-signer on the loans. Some loan servicers may cancel the loan once the student dies, though that isn't always the case and you will want to know the terms and conditions of the loan. "If you have private student loans, you need to make sure you have carefully read your lender's policy regarding discharge of debt. Some lenders may offer death discharge, but many do not, which means they may come after your estate to collect any remaining balance on your student loans," says Joshua C. Heckathorn, President of CreditNet.
Dealing with the death of a loved one is difficult enough, throwing student loan debt into the situation makes a tough time that much more difficult. Not having the funds to cover such a situation makes it more problematic as lenders will come after the debt.
What if You're Married?
If your spouse passed away and had student loan debt, it's possible the loans will be forgiven. However, that's not always the case. If they incurred the debt after you were married and you co-signed on the loan, it's possible you'll be liable for those loans. However, if they incurred the debt before your marriage, it would act the same as any other federal loan.
A wrinkle comes in, however, if you reside in a community property state, which may make it more difficult to discharge the debt. If you live in a community property state, you will want to check on the legality of what happens in the event of your spouse passing with outstanding student loans. You may not be responsible if they incurred the debt before marriage, but it pays to check.
Options to Consider
What happens to student loans after you die isn't a straightforward answer. As such, it's important to find options now to protect your loved ones. If you currently have student loans, it's wise to pursue refinancing your student loans. Doing so will help you save money on the loans and pay them off quicker. You can compare rates on LendingTree to find the best refinancing option for your particular situation.
Life insurance is another solution to consider. You or a parent or spouse can purchase enough term life insurance to cover the expense of paying off student loans in the event of your passing. Having such coverage can provide peace of mind if the worst were to happen.
Dealing with student loans after death isn't fun to think about, but there are ways to protect family members from the added stress of debt after your passing.