If you are not sure what happens to student loan debt when you die, you’re not the only one.
In fact, more than 70 percent of borrowers don’t. And it isn’t surprising, given that death is a scary thing to talk about.
Still, knowing what happens to a debt when the borrower dies is important because it does have a legal effect on your co-signer (if you have one) or your family members.
Let’s look at the different scenarios that could happen when you die before your repayment term expires.
What Happens if You Owe Federal Student Loans?
Federal student loans are those provided by the government, with terms and conditions set by law.
According to the U.S. Department of Education, the loan is automatically canceled if the borrower dies.
Discharge Due to Death
Generally, your federal student loans will be discharged when you die.
Basically, this means that your co-signer, spouse, or parents will not have to pay off your remaining balance.
This rule applies to all forms of federal student loans, such as Direct Loans, FFEL Program loans, and Perkins Loans.
It is also applicable for federally backed education loans.
Although the U.S. Congress stopped the guaranteed student loan program in 2010, many still pay off their federally guaranteed loans, so they still exist somehow.
The same protection also applies to Parent PLUS loans, which are federal loans taken by parents on behalf of their children.
Therefore, if you or your parent passes away with a balance still in due, the Parent PLUS loan is immediately canceled or discharged.
Tax Exemptions on Loan Discharges
Not so long ago, debt cancellations or discharges were considered “taxable” income by the IRS.
This means that your parent or spouse will still pay for your loan somehow in the form of taxes.
Then, Former President Trump signed the Tax Cuts and Jobs Act in 2018.
With this, student loan debts are deemed forgiven without any tax consequences in the case of the borrower’s death.
It’s worth noting, however, that this tax exemption is only in effect until 2025.
How To Apply For Loan Discharge
The loan will be discharged when a family member or other representative submits acceptable documentation (original death certificate) to the loan service provider.
Do note that some lenders may request additional requirements or documentations.
Thus, the borrower’s representative should coordinate with the loan provider for the next steps to take.
What Happens if You Owe Private Student Loans?
When it comes to private student loans, discharges may or may not happen.
If you die, there’s no guarantee that your co-signer, parent, or representative will be relieved from your obligation.
The good news is that many major lenders offer loan cancellations to families who’ve had their children passed away.
However, private student loan discharges related to the borrower’s death aren’t as straightforward as that of federal student loans.
As such, you may have to dig deeper into their policies or the terms of your loan contract to see whether you are offered such protection.
What if Your Lender Doesn’t Have a Death Discharge Policy?
Private loans are very hard to cancel, primarily because private lenders are not required by law to offer death discharges.
That said, unless they make a promise about loan discharges, they won’t.
Recently, major private lenders such as Sallie Mae, NYHELPs, and FastWeb, announced offering disability and death discharge programs for their policy-holders.
If you have taken out a private student loan from any of these companies, you’re in luck.
Some private lenders will offer cancellation for some loan products.
Others will offer to cancel only a portion of the loan and under certain circumstances.
If the private lender doesn’t cancel the loan, the remaining balance will have to be paid through the deceased borrower’s estate.
This is similar to how most forms of loans are dealt with.
If there’s not enough money in the estate to settle the debt, the loan balance remains unpaid.
Regardless of whether the deceased borrower has not enough estate, the loan obligation won’t be passed to someone who is not legally responsible for the debt.
The Case for Co-Signed Student Loans
Unfortunately, in some cases, your parent or representative might still have a legal obligation to repay your student loan when you die.
This is true in the case of a co-signed private student loan.
In co-signed loans, both the primary borrower and the co-signer have a legal responsibility to repay.
That said, if the borrower dies, the private lender can go after the co-signer.
Note that in the eyes of the lender, your co-signer is equally responsible for the repayment of the full amount of your student loan, not just a portion of it.
Co-signed student loans can also become problematic if it’s the co-signer who dies.
In some private student loan agreements, the borrower is automatically put under default if the co-signer dies, even if the borrower is consistently making payments.
Being in “default,” the borrower might be obliged to pay off the loan balance in full right away.
Can Private Lenders Go After Your Spouse?
The general rule is that your spouse will not be liable to pay off your remaining student loan balance unless he or she is your co-signer.
However, in community property states like California, Idaho, Louisiana, Texas, and Washington, all financial obligations that either spouse incurred during the marriage are considered “joint debt.”
Basically, this means that both spouses are responsible for repaying the loan.
If you’re married, and you take out a student loan to cover your post-grad expenses, for example, your spouse will have to take on your loan repayments when you die.
New Policies on Co-Signed Student Loans
Fortunately, the Economic Growth, Regulatory Relief and Consumer Protection Act of 2018 has addressed the growing concern over loan discharges in co-signed private loans.
Specifically, it focuses on the burden they bring to borrowers and co-signers.
According to this law, loans taken out after November 20, 2018, must exclude co-signers from repaying student loans if the principal borrower dies.
That said, if you have recently taken out a private co-signed student loan, you can be sure that your co-signor is relieved in case the uneventful day happens.
Still, for loans taken before the said policy took effect, co-signers may be obligated to pay off the borrower’s loan balance.
That is, unless the policy states otherwise (as laws don’t have a retroactive effect.)
What You Can Do To Protect Your Family
Now that you know what happens to student loan debt when you die, you must be concerned about how you can protect your parents, spouse, or your co-signer.
Certainly, you don’t want to burden them in case the unthinkable happens.
Here are the steps every student borrower can take to protect their loved ones from expensive surprises after their death:
Check the fine print.
Review your lending agreement if it provides any details about loan discharges in case of a death.
If it’s not stated in the fine print, you may need to set an appointment with your lender to get further clarifications.
Talk to your family.
It’s something that we all refuse to talk about, but it’s necessary considering that other people may get involved if death does happen.
Most often, many parents are unaware that their children took student loans.
Therefore, debt obligations often come as a surprise, making such a stressful time even worse.
It’s best to discuss matters like this with your parents, spouse, or loved one and inform them of what they have to do in that case.
If you’re not comfortable doing it, you can just create a document of all your loan obligations and relevant information that your family or co-signer needs to know.
Know your other options.
If, after examining your private student loan, you realize your co-signer lacks protection from the borrower’s death, check if there are other options available, such as settlements.
While private student loan settlements are difficult to get, they are possible sometimes.
The problem is, the lender may require very large lump sums even if the co-signer has a low income.
Release your co-signer.
If you’re already making regular payments to your student loans, the only way to protect your co-signer is to get a co-signer release.
This proves that you are capable of making payments on your own.
To obtain a co-signer release, your lender might ask for some requirements, like on-time payments for up to 48 months, an excellent credit rating, a completed degree, and more.
If this isn’t feasible, try refinancing your student loan but without a co-signer this time.
Get life insurance.
As a last resort, you can get a term life insurance policy with a payout that your estate can use to pay off your remaining loan balance.
What Happens to Student Loan Debt When You Die?
Most people aren’t comfortable talking about death.
Sometimes, it’s necessary, especially if it’s tied with some legal and financial consequences, like in the case of student loans.
Whether you’re thinking of getting a student loan or already making payments, it’s good to know your options.
In this way, you can protect your loved ones from becoming liable to your loan obligations when you die.
At the same time, you can properly plan and avoid leaving the burden to them.
