If you dont know what would happen to your student loans if you die, youre not alone.
In a recent survey of about 400 borrowers, Haven Life—a life insurance company supported and owned by MassMutual—found that nearly three out of four student borrowers said they had no idea how their death would affect their loans.
However, Barbara Ginty, a certified financial planner and the host of the “Future Rich” podcast, notes that it’s not surprising that the majority of people are ignorant of what occurs when a student loan borrower or co-signer passes away.
“The reason is because it is a scary thing to think about. losing a parent, most often the co-signer, or a parent losing a child,” she says. “Most people dont think about it until something happens. “.
For some borrowers, that may be OK. A “death discharge” will eliminate the remaining balance if all of your loans are federal student aid and are in your name. “The loans will be discharged if a friend or relative provides your loan servicer with a death certificate or other documentation proving their passing.”
Inheriting Student Loan Debt: What You Need to Know
Losing a loved one is never easy and dealing with their financial affairs can be an added burden during a difficult time. One of the concerns that may arise is whether you are responsible for their student loan debt. The good news is that, in most cases you will not be personally liable for someone else’s student loans. However, there are some exceptions, and it’s important to understand the rules so you can be prepared.
Federal Student Loans: No Inheritance Automatic Discharge
If the deceased had federal student loans, you’re in luck. These loans are automatically discharged upon the borrower’s death. This means that the debt is forgiven and no one is responsible for repaying it.
Private Student Loans: It Depends
The situation with private student loans is more complex. Unlike federal loans, private loans are not automatically discharged upon the borrower’s death. The terms of the loan agreement and the lender’s policies will determine who is responsible for the debt.
Here are the scenarios to consider:
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Debts solely in the name of the deceased: Generally, if the deceased was the only borrower on the loan, the lender will write it off as a bad debt. However, some lenders may pursue the deceased’s estate for repayment.
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Loans with cosigners: If the deceased had a cosigner, that cosigner is liable for the debt repayment. This applies to all private loans taken out before November 20, 2018. The Economic Growth, Regulatory Relief, and Consumer Protection Act will release the cosigner from their obligation upon the borrower’s death for loans taken out after that date.
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Community property states: In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), a spouse may be liable for the deceased’s student loan debt if it was taken out during their marriage.
What You Can Do to Protect Your Family
There are things you can do to prevent your loved ones from inheriting debt, even though you have no control over the terms of private student loans:
- Talk to your parents (or other borrowers): If you have federal loans, let your parents know who your servicer is and how to contact them so they can easily submit a death certificate if needed.
- Consider cosigner release: If you have private loans with a cosigner, inquire about cosigner release options. This would remove your cosigner from the loan and ensure they are not responsible for the debt in the event of your death.
- Refinance with a cosigner release policy: If your current lender doesn’t offer cosigner release, consider refinancing with a lender that does.
- Take out a larger life insurance policy: As a last resort, you can consider taking out a life insurance policy with a payout that can cover your outstanding student loan debt in the event of your death.
Additional Resources:
- NerdWallet: What Happens to Student Loans When You Die?
- StudentAid.gov: Forgiveness Options: Death Discharge
Remember: It’s always best to be proactive and understand your options when it comes to student loan debt. By taking the necessary steps, you can ensure that your loved ones are not burdened with your debt in the event of your passing.
If your parents are helping out
The same protections are in place for Parent PLUS loans. If your parents take out that type of loan, you bear no responsibility for paying back the loan. The government handles your parent’s debt the same way it handles ordinary student loans and has it discharged if they pass away with a balance still owing. If youre the one to die, the loan is also forgiven.
It used to be that the IRS treated these debt cancellations as taxable income, but President Trumps Tax Cuts And Jobs Act, which went into effect in 2018, changed things. Now if a student passes away, or suffers a life-altering disability, their student loan debt is forgiven without any tax consequences. Its worth noting, however, that the provision is set to discontinue in 2025.
The way private lenders handle death can vary
Federal loans make it fairly straightforward to discharge student loan debt because of a death, but the stipulations around those issued by private lenders can vary. About 1.4 million Americans have borrowed from private lenders, according to a report by LendEdu.
The government’s death discharge protections will be lost if you consolidate your federal student loans with a private lender, according to student loan debt expert and founder of The College Investor Robert Farrington.
And when it comes to private lenders, discharges happen on a “case by case” basis, says Elaine Griffin Rubin, the senior contributor for financial aid site Edvisors. The good news is that many major lenders are offering this type of relief more and more to families who have had their children pass away, Rubin says.
However, you may have to really dig for information about their policies. While popular refinancing company SoFi doesnt list death and disability discharge as an option for borrowers, The College Investor confirmed this lender does offer to forgive loans if the borrower should pass away.
But Ginty advises you to check the fine print beforehand because lenders might not be as understanding if a co-signer passes away, like a parent.
She notes that this happened to one of her clients. “Private lenders frequently have a clause stating that the loan goes into automatic default if the co-signer passes away,” she says. The student borrower was making timely and current loan payments when her father unexpectedly passed away from a heart attack. “Her loan balance was due immediately,” Ginty says. Fortunately, her client’s father had life insurance, which allowed the family to settle the debt.
Additionally, if youre married and your spouse takes out student loans, you may be on the hook even if your name isnt on the loan. Thats because if you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington or Wisconsin; Alaska has an optional community property provision), all property, including debts, are pooled and considered to belong to both spouses.
Should I Ask For My Inheritance Early To Pay Off Debt?
FAQ
Will I inherit my parents student loan debt?
Can student loan debt be passed to children?
What debts are not forgiven at death?
Do I inherit my wife’s student loan debt?
What happens to federal student loans if a borrower dies?
Federal student debt is discharged upon the death of the borrower. Many private lenders will also cancel debt when the borrower dies, but policies vary by lender. Loved ones or spouses can’t inherit student loan debt. What happens to federal student loans? What happens to private student loans? What happens to cosigned or a spouse’s loans?
Can a student loan be discharged if a parent dies?
If the parent borrower or student the PLUS loan was taken out for dies, the debt will be discharged. The only exception is if you co-signed the student loan. This usually is done with private loans. In that situation, the cosigner may find themselves responsible for what’s left of the student loan debt.
Does student loan debt transfer to spouse when spouse dies?
Neither federal student loan debt nor private student loan debt automatically transfers to your spouse when you die. As I shared above, federal student loan debt goes away when the borrower dies.
Can an inheritance be garnished for student loans?
An inheritance can’t be garnished for federal student loans or private student loans. But if you are sued for student loan debt and a court enters judgment against you, your student loans could, depending on your state’s laws, levy (take) the inheritance out of your bank account. This type of debt collection rarely happens.