There are two issues many people avoid thinking about: death and debt. Student loan debt is part of life nowadays for students obtaining advanced or professional degrees. As of 2017, the total national student debt was over $1.4 trillion with college students graduating with an average of $17,126 in debt.
So, what happens to 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 that you consider your debt as you work on your financial and estate plan.
Types of Student Loans
- Federal student loans. If the debt is a federally backed education loan that the student took on by him or herself, then the loan is automatically canceled when the student dies and the government discharges the debt.
- Private student loans. Whether a private student loan is canceled after the borrower’s death depends on the specific lender’s policies. Check with the lender to find out if they offer any death discharge protection.
- 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.
- 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.
- Cosigned student loans. If you have a cosigned student loan and the primary borrower passes away, you are still on the hook for the debt. As the cosigner, 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.
Seek Professional Advice
If you or someone you know has student loan debt, make sure to speak with an experienced estate planning attorney to 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 today to see how we can help.
Posted in: Student Loan Debt