If you die, your student loan debt may be the last thing on the mind of a parent or spouse. Eventually, it’s a debt the survivors will have to deal with — either by making payments, asking for the loan to be discharged, or have the borrower’s estate pay it.
Whether or not a survivor has to repay a student loan depends on the type of loan, if they’re a co-signer on the loan, and state laws on community property, among other factors.
“You just don’t think of these things happening to young people,” but drownings, drunken driving and other things kill college students, says Pat Watkins, director of financial aid at Eckerd College in St. Petersburg, Fla.
Here’s a breakdown of how student loans are repaid if the borrower dies:
When is a spouse liable?
Several things determine if a spouse is liable for student loan debt. They’re typically not because no debt can be inherited, says Rob Drury, executive director of the Association of Christian Financial Advisors, a nonprofit network of financial professionals.
“Unless an heir previously had an obligation to repay the loan, such as being a co-signer or the actual loan borrower — as in a Parent PLUS loan — the loan dies with the borrower,” Drury says. The lender can claim against the borrower’s estate, he says.
Living in a community property state, however, can typically make a spouse liable for a spouse’s debt, whether their name was on the original loan or not. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
Community property laws, however, won’t have any affect if the loan is discharged by the lender.
Federal student loans
A federally backed loan is automatically canceled and the debt is discharged by the government if the student dies or is permanently disabled.
“They do that so that it’s not a burden on the family,” says Watkins, the financial aid director.
These include the four components of the Federal Family Education Loan program, or FFEL: Stafford Loans, Unsubsidized Stafford Loans, Federal PLUS Loans, and Federal Consolidation Loans. A federal Perkins Loan, which is administered through the school, is also forgiven upon death.
For a parent who is a PLUS loan borrower, the loan may be discharged upon their death, or if the student on whose behalf they obtained the loan dies.
How to get a federal student loan discharged
If a student dies, the best way to have the loan discharged is to send a copy of the death certificate to the student’s school. Some federal loans require a death certificate be sent to the loan servicer. If a student is permanently disabled, a discharge application can be submitted.
Up until about five years ago, only a letter was required by the federal government to prove the death of a borrower, Watkins says, which resulted in scams by students claiming to be their parents and saying they’re dead so they don’t have to repay a student loan. Death certificates are now required.
Policies vary by bank, but most private lenders don’t forgive student loans when a student dies or is permanently disabled.
The reason is that student loan programs started as partnerships between the federal government and lenders, and the government promised that the loans would be guaranteed to be repaid, Watkins says.
The co-signer of the private loan, usually a parent or grandparent, is required to make payments after a student dies, she says. “This is something most parents don’t think about when they agree to co-sign a private loan that has a lower interest rate than the PLUS,” Watkins says.
Private lenders that offer death and disability forgiveness include Wells Fargo, the Sallie Mae Smart Option Student Loan, and HESC’s NYHELPs loans. The NYHELPs loans may be discharged if the borrower dies — including while on active military duty — becomes totally and permanently disabled, or has filed for bankruptcy.
Many banks have gotten out of the school lending business because it’s not profitable, she says, such as Chase and Bank of America. Bank of America, for example, has stopped funding federal student loans, and is no longer accepting applications for Stafford, PLUS or Graduate PLUS loans, according to its website.
A co-signer can ask a private lender to discharge a loan, and lenders may grant exceptions on a case-by-case basis. Some lenders may require survivors to pay the full loan balance immediately, and may not allow them to consolidate loans or rework repayment terms.
Private lenders collecting debt
A deceased person’s estate will likely be the first place a private lender will go to collect on a loan. If the estate can’t pay off the loan, the co-signer would be next in line.
“This is the risk one takes when co-signing or being a joint account holder, whether the person dies or simply defaults on the loan,” says Gary Altman, founder of the estate planning law firm Altman & Associates in Columbia, Maryland.
The next person to face the debt would be a spouse. Community property laws in some states exempt education debts so that the spouse isn’t liable for a debt they didn’t co-sign for it.
When there isn’t a co-signer, the debt isn’t typically passed on to heirs, Altman says. “Instead, the debt is passed on to the deceased’s estate and then state law kicks in to protect creditors,” he says.
Why a student needs life insurance
Since student loans can last a long time — 15 years for a student getting a master’s degree and extended for up to 20 years — it can make financial sense to have life insurance as a student.
If nothing else, enough life insurance should be bought to cover the loan balance and any interest rate charges. It’s a way to leave heirs such as a spouse, parents or grandparents, without a large debt to have to pay after a student dies.
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