- December 30, 2020
- Posted by: Carter Davis
- Category: Knowledge Base
Death and student loans are by no means easy topics to talk about but both are necessary to consider for the sake of your parents and other family members. To avoid lenders taking advantage of your weakened family after an unfortunate death, it’s important to do your research regarding what happens to student loans when you die. It may be a difficult topic to talk about with family members but having the conversation now will prevent student loan confusion if something ever happens to you.
Federal Student Loans and Death Discharge
Thankfully, the federal government has protections in place for the families of borrowers who die with unfinished loans. If you, the borrower, die with any balance of federal student loans remaining, the government discharges the full amount and it is not passed on to any other family member. Discharge due to death requires proof of death but once your representative presents it, the government will not ask for any more payments of owed federal student loans.
Make sure to have a conversation with a trusted individual to handle the presentation of your proof of death in case of a tragedy. You may also consider adding the loan information to your will to ensure that your representative handles it and the government cancels it.
Parent PLUS Loans
If your parent was the borrower of a federal Parent PLUS loan and passed away, the loan does not fall into your hands. Provide the servicer with proof of their death and the government will cancel it as they would if it were your own federal student loan. Even though the loan paid for your schooling, you are not responsible for the payments as your parent was the official borrower of the loan.
Proof of Death
You can ask your federal loan servicer what counts as a proof of death, but they will likely ask you for the death certificate of the borrower, a certified copy of the death certificate, or a complete and accurate photocopy of the death certificate. The servicer may ask for more documentation, so it is important to research their policies.
Private Student Loans and Death
Death becomes a little more difficult with private loans than it would on the federal level. Because the government is not in charge of private lenders, how they handle their death policies will vary from lender to lender. Ideally, they handle death of the borrower the same way that the government would; however, it is more likely that the private lender takes advantage of the borrower’s family and continues to ask for money.
After the borrower dies, the family should ask the lender for “compassionate review.” A compassionate review undertaken by the private lender may result in loan forgiveness or release of the co-signer. Know the lender’s death policies before signing an agreement—it may save your family from unnecessary financial pain. Some private lenders may require the borrower to authorize a representative to present the proof of death, such as via the will.
Loans Added To Your Estate
For private student loans with no co-signer, your student loans will likely fall into your estate if you die. Your estate is the collection of money, belongings, and property that you own—not just a large house. The lending company will try to take money from the estate, but if there is not enough to pay off the loan then it will likely remain unpaid and fall off.
Loans Given To Your Co-Signer
Co-signing a private student loan is a big responsibility—often the loans will fall onto the co-signer in case of an unfortunate death of the borrower. If your parent or parents took out a private student loan and had you as the co-signer, you may be responsible for the remainder of the loan payments after their passing.
If the co-signer of your loan dies, rarely private lenders take advantage of the situation by forcing the loans to default even if the borrower has been making regular payments. In this case, the lender may attempt to force the borrower to pay the full defaulted amount in a lump sum payment. This is a toxic practice and if you notice this is the case in the fine print of your loan agreement, it might be time to refinance into a new lender.
Protections Given To Private Loan Holders
Recent student loans granted after November 20th, 2018 qualify for co-signer protections in the case of a borrower’s death—even for private student loans. If a student loan was issued after November 20th, 2018 and you were the co-signer, you are not responsible for repaying any amount and the private lender must release you. Student loans taken out before this date fall under the discretion of the private lending company.
Will the Loans Fall onto My Spouse?
For many states, unless your spouse is the student loan’s co-signer on the loans, the borrower’s spouse is not responsible for the remainder of the student loan. This is especially the case of federal student loans, which the government discharges after borrower death.
Private student loans may prove to be difficult as the lender can go after your estate if you die with unpaid loans and they do not offer loan death discharge. If you are married and share belongings or finances, the lender may try to take from them.
While there are nation-wide protections for recent co-signers, some states have what is known as “community property” laws. If you live and own belongings or loans in any of the following states, your spouse may acquire your private student loans if you die:
- New Mexico
Some states offer specific protection from student loans and will not require the spouse to pay off the deceased’s private student loans. Check the specific laws of your state if you are concerned about your student loans falling onto your spouse.
Will There be Taxes on the Discharged Amount?
Thanks to the Tax Cuts and Jobs Act of 2017, when any student debt is cancelled due to death, no one owes taxes on the discharged amount. This law will last until 2025. As always, check with your state’s government to see if any state-wide laws affect you, your co-signer, spouse, or your representative in death.
Still need more information about what happens to student loans when you die? Whether you need answers, advice, or need to find a student loan consolidation program for a lower monthly rate, contact Hope Credit for advice from our
student loan professionals. Contact us today for answers and reassurance about your mountain of student loans.