What Happens to Your Student Loan Debt When You Die?
With two daughters graduating this year, this post is extremely personal. Regrettably, some this did not apply when they began.
There are two issues many people prefer to avoid thinking about: death and debt. Unfortunately, both of these seem to be inevitable. Student loan debt is a part of life nowadays, particular for students obtaining advanced or professional degrees. As of 2017, the total national student debt was over $1.4 trillion and the average student loan debt for the Class of 2017 graduates was $39,400, up six percent from the previous year. To put that figure in perspective, that was about $620 billion more than the total U.S. credit card debt.
And presently, many students who graduated this past spring, are confronting the reality of having to begin paying off their own share of this massive student loan debt. Students are not alone in their debt load. Approximately $81 billion of the debt are in Parent PLUS loans. Whether it is worth it, or if the system is broken are conversations for another day. This conversation is about student loan debt and estate planning.
So what happens to your student loan debt when you die? Below are the different types of loans and what happens to the debt in the event the borrower passes away. Although it may not be a pleasant topic, it is imperative you consider your student loan debt as you work on your financial and estate plans.
Types of Student Loans
Federal student loans. If the debt is a federally backed education loan the student took on by him or herself, then the loan is automatically canceled when the student dies, and the government discharges the debt. These loans have no co-signer, and the legal terms governing the loans specify the debt is canceled upon the death of the student.
Private student loans. Whether a private student loan is canceled after the borrower’s death depends on the specific lender’s policies and the loan’s legal documents. Check with the lender to find out if they offer any death discharge protection. Some, but not all, private lenders provide this protection to their borrowers.
Refinanced student loans. When you refinance your student loan debt, the terms of your old loan are replaced by new terms you agree to when you sign the refinancing documents. While there may be some financial benefits to refinancing your student loans, the terms of your new loan and policies of your new lender will now control your loans. You may lose death discharge protection if you had it in your original loan but it is not present in the new ones.
Parent PLUS loans. When a parent takes out a PLUS loan to help pay for a child’s education, and either the parent (borrower) or the child (student) later dies, the federal government will forgive the debt. However, if the student dies, the borrower may receive a 1099-C form, which treats the wiped-out debt as taxable income. As is the case with all tax issues, you should discuss your situation with a qualified tax advisor.
Co-signed student loans. If you have a co-signed student loan and the primary borrower passes away, you are still on the hook for the debt. As the co-signer, if you die, the primary borrower may be required to pay the entire balance of the student loan in full. In this event, it is essential that the primary borrower check the lending agreement and discuss the situation with the lender to see what relief, if any may be available.
NOTE: As a co-signer, when this loan comes due, it will show up on the student's and the co-signer's credit report as a debt obligation. This is also true if a payment is missed or if the loan goes into default.
Seek Professional Advice
If you or someone you know has student loan debt, let us help you make sure your loans are taken into account when preparing your will or trust. Depending on the type of student loan you have, your estate may or may not be burdened with your debt after you pass away. Factoring in your loans when designing your plan helps ensure that your family is completely protected. Give us a call at 301.892.2713 today to see how we can help.
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