What Happens to student loans when you die?
Many times people will ask me about what happens to student loans when they die. It is becoming increasingly important as student loans are becoming a larger and larger influence on the financial state of the public. Last year, the total national debt is getting close to a trillion and a half dollars and about eighty billion of this debt is in parent PLUS Loans, meaning that this debt doesn’t just effect the newly graduated.
There is no simple answer to what happens to student loans. The true answer is depends, but to give you some guidance on what will happen there are different categories of students loans. The different categories as well as the specific terms of the contract that you signed when taking on the student loan debt all factor into whether the debt is discharged or not when someone passes.
Types of Student loans:
Federal student loans: Federally backed student loans are pretty simple at death. When the borrower dies, the government discharges, meaning forgives, the debt. These loans do not have cosigners which makes them even simpler. When the student dies the debt disappears.
Private student loans: Private student loans are less simple. When the student dies the debt may or may not be forgiven. Whether the debt disappears all depends on the lender’s policies and the contract that you signed when you got the student loan.
Refinanced student loans: The original loan terms will not control if you have refinanced the student loan. If you did have a student loan that fell in either of the above two categories and then you refinanced the loan with a new lender. The terms of the agreement that you signed with the new lender along with the new lender’s policies are the ones that control.
Parent PLUS loans: Much like the federal student loans, the Parent PLUS loans are discharged when the student dies, there is added complexity here, though because there is a parent who is borrowing for the child. With parent PLUS loans if the parent or the child pass, the debt will be forgiven, but there may be a 1099-C form issued to you, treating the forgiven loan as if it were income to the borrower.
Cosigned student loans: A co-signed student loan, unlike the Parent PLUS loan, is still enforceable if either cosigner on the loan is still living. So if one cosigner passes, it is still the responsibility of the surviving cosigner to pay the loan. It is important to look at the terms of the agreement to see what happens to the debt when the surviving borrower passes.
Find a professional: If you are in the process of planning your estate, it is important that you take all of these intricacies into account when you are creating the documents and financial plans to make sure your family is well taken care of in the event of your passing or the passing of a loved one.