Thinking about your eventual death isn’t fun. But it’s something you need to plan for, especially if you’re one of the 44 million Americans with student loan debt. You want to know if your debt could be passed on to someone else.
Whether or not your student loans pass on to someone else when you die depends on the type of loans you have. Take the time to figure out where you stand so you can reduce the chance that your loved ones end up bearing the brunt of your debt.
YOU HAVE FEDERAL STUDENT LOANS
When it comes to federal student loans, the news is pretty good. “Federal student loans are discharged when the borrower dies,” said Jay Fleischman, a student loan lawyer.
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. To receive this discharge, your survivors need to present a certified death certificate to the loan servicer.
YOU HAVE PARENT PLUS LOANS
Parent PLUS borrowers are also eligible for a death discharge since 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.”
Realize, though, that there are 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.
YOU HAVE PRIVATE STUDENT LOANS
If you have private student loans, things get a bit trickier. Some private student loan lenders do offer a death discharge, but not all of them.
Private student loans, including refinanced loans, are more like traditional personal loans. As with 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.
YOU HAVE A COSIGNER
If your private student loan has a cosigner, though, which many of them do, you might be in trouble. Your cosigner 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 are you to do if you have cosigned student loans? Look into a cosigner release.
Typically, lenders 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. Once you’ve done this, you can obtain cosigner release. However, not all lenders offer this option.
In some cases, it makes sense for parent cosigners 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 cosigned 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 or more.