According to the U.S. Department of Education, 42.9 million Americans have student loans. It takes the average person 20 years to pay off their student loans. The average student loan holder leaves school with $30,00 in debt. Given these numbers, it is not surprising that many people die while still repaying their loans. Three out of four student loan holders have no idea what happens to their loans if they die. What happens to your loans if you die depends on the types of loans you have taken out.
Federal Student Loans
Loans taken directly from the federal government are federal student loans, sometimes called Stafford loans. There are several types of these loans:
- Direct Subsidized Loan: This is offered to students in serious financial need. The government pays the interest, as long as the student is enrolled at least half-time in school. Interest is not charged until six months after graduation when payments begin.
- Direct Unsubsidized Loan: This is available to any student, regardless of financial need. Interest begins to accrue as soon as the loan is made and continues throughout the life of the loan. It has a low fixed interest rate, but there are limits on how the funds can be used, and the student must complete a FAFSA every year.
- Direct PLUS Loan: These loans are made directly to graduate or professional students through schools that participate in the Direct PLUS loan program. Parents of the student can also take a Direct PLUS loan for undergraduate students, and there is no requirement of financial need. These loans generally have a low fixed interest rate. When the Direct PLUS loan is made directly to the parent, it’s commonly referred to as a Parent PLUS loan and requires the parent to reapply and pass a credit check each year. When the Direct PLUS loan is made to the graduate student, it is considered a Grad PLUS loan.
- Direct Consolidation Loan: A student who leaves school with two or more federal loans can consolidate them into one loan with a fixed interest rate equal to the average interest rate of all the loans. Usually, consolidation is only allowed once, so choose when to do this wisely.
If the student dies, all of the above kinds of loans can be discharged.
Because a Parent PLUS loan is a loan the student’s parent takes out, the parent is responsible for paying the loan back. If the parent dies prior to paying off that loan on the student’s behalf, the loan can be discharged.
To get a loan discharged, the estate’s personal representative provides the death certificate and any other documentation required to the loan office to process the discharge. Once that is done, the balance of the loan is completely forgiven.
Private Student Loans
A private student loan is one taken out from a private lender that the federal government does not subsidize. There are a variety of types of private student loans, including degree-specific loans, student loans for people with bad credit, international student loans, state-specific loan programs, and income share loans (that require you to pay a percent of your income after graduation rather than a set loan payment amount).
If you take out a private student loan on your own, without a co-signer, the loan’s terms will determine if it is discharged should you die before repaying it. Most do forgive a loan upon the death of the borrower, but it is best to check your loan documents to be certain.
If you have a co-signer on your private student loan, that person remains responsible for the loan even if you die, unless the terms of the loan state otherwise. If your co-signed loan was taken out before November 20, 2018 and the lender does not have a discharge policy, they must allow your co-signer to apply for a compassionate review if you die. The lender has the discretion to forgive the loan if warranted by the circumstances, but it is not guaranteed and is handled on a case-by-case basis.
Discharged Student Loans and Taxes
If your student loan is discharged due to your death (or the death of a parent who took out a Direct PLUS loan), it will not impact your tax status. The discharge of the loan is exempt from taxes (as opposed to some other discharged loans, which are considered taxable income).
Steps You Can Take Concerning Your Loans
The most important thing to do regarding your student loans is to make your payments on time and keep good records. Make sure details about your loans are easily accessible so that if something happens to you, your family can locate them.
Check your existing loans to determine what the discharge on death policy is. If you are applying for private loans, ask about the discharge on death policy and use that to inform your decision about the loan. If you have loans that will not be discharged if you die, consider refinancing them into loans that offer this. If you are concerned about the impact a student loan that cannot be discharged upon your death will have on your family, consider taking out a life insurance policy in the amount of the loan.
Life insurance policies can be a very effective way to leave funds for personal loans that may not discharge upon death. However, life insurance beneficiaries do not have to go through probate to receive life insurance money, so it is important to choose your beneficiary carefully if your goal is to leave enough money for your estate to pay back loans.
Discharge of Student Loans and Your Estate
If you die with existing student loans, your personal representative is responsible for handling them. If the loans can be discharged, they will submit the necessary documentation to the lender to obtain the forgiveness. If they cannot be discharged, they will handle the transfer of the loan to the estate or to the co-signer. Since many students loans are forgiven upon death, the discharge of the loan frees up the deceased’s assets so that their heirs can receive the assets without paying back the loan.
When creating an estate plan, including your will, your attorney will carefully assess your assets and debts and help you plan for the future. Burnham Law attorneys have years of experience with estate law and are prepared to help you understand all of your options and obligations. Schedule an appointment with us today by calling 303-653-9497.