How's that topic for a Monday morning? 🙂 What happens to your student loans if you die isn't something we really like to think about. Honestly, we probably NEVER want to think about it. The internet is supposed to be filled with cat gifs and funny “haters gonna hate” memes (my personal favorite).
Here's the issue: the repercussions from your death can be far reaching if you have a lot of student loan debt. Depending on the type of loans that you have, you may be screwing your family members over and not even know it.
Let's take a look, shall we?
What happens to your student loans if you die?
The big distinction here is the type of loans that the borrower holds.
Federal Loans
Basically, you are in the clear if all of your loans are federal. Direct Loans, Federal Family Education Loans, and Perkins loans are all discharged upon death.
The process is fairly simple. A borrowers' family needs to send a death certificate to their loan servicer, and about 10ish days later the loans will be discharged. Any extra balance or payments are reimbursed (not that you'll really need the cash where you're going, but whatever).
Private Loans
This is where it becomes no bueno. Private loan companies are under no legal obligation to discharge your student loans upon death. They can go after your family pretty freaking hard.
First, they will try to extract the remaining balance from your estate (the joke is on them, we don't have an estate). Once they realize that you left the amount of $1.16 on a gift card and an iPhone to your cat, they move on.
After the failed estate plan, the lender goes to any co-signers on the loans, and then your spouse depending on the property laws of the state that you live in.
What goes hand in hand with death? Taxes.
If you had a cosigner on any loans that were forgiven, Uncle Sam may be expecting a cut. Cancelled debt can be considered taxable income for the co-signer if the lender reports it on a form 1099-C.
So the moral of the story? Try not to die.
Look – obviously no one really wants to deal with or think about their own death. However, if you are working down a high amount of student loans (private or federal) you need to have a talk with your loved ones about this.
The last thing you want is for your student loans to be a horrible surprise for your family in a time of grieving. They (the loans not your family) already suck enough as it is.
What can you do to protect your loved ones from an unexpected student loan burden?
Live differently, your bank accounts will thank me later. ~M$M
I’ve had some personal experience with this. My mom died while I was in college and she had taken out $20K in federal PLUS loans (parent loans for their kid’s education). I still left college with $30K of debt, but that number was WAY BETTER than $50K. I’m not big on government hand outs, but at the time, my loan payments the first several years were $450 a month, and I would have been crushed had they been close to $1000. To this day, I always wish I had the funds to repay what my mom cost the government, but by the time I have that saved up, my kids will be ready for college, and I have to make sure we break the debt cycle and not take out loans (or at least BIG loans) for them. Moral of the story: If your parents have to take out loans, get them to take out federal ones, ESPECIALLY if they aren’t in the best of health. (By the way, she died sixteen years ago and I still owe $14K on my student loans. Don’t rack up a shit-ton of debt when you get out of school, use student loans to finance your honeymoon (yes, I did that), or be too proud to keep living like you’re in college once you’re OUT of college. The sooner you can escape the debt cycle, the sooner you will have true freedom in your life!)
Lots of great points in this ^^^ I agree, if you are going to take out loans as an adult it REALLY needs to be federal so your kids are stuck footing the bill if something happens. I wouldn’t worry about paying the government back, I’m sure they have gotten their fair share from you already!
Another great article Bobby!
Cosigners may consider buying life insurance on the primary borrower as a source of protection. The premiums would be tiny for most young adults.
Thanks Nate – I spoke with a life insurance company a few weeks ago and they talked to me about policies for young people with a lot of debt. I’ve never really liked the idea of paying extra monthly for insurance, but after seeing what some of these private loan companies can do if something bad happened…it’s scary. Life insurance can definitely be a responsible choice in a lot of these situations.
Thanks for the article. Lots of good info. Another testament of why debt is not something that you should play with. Be careful and avoid it as much as possible.
No problem! Unfortunately, schools are pushing kids towards student loans at a scary rate. 🙁
I just had this conversation with my best friend! It’s depressing, but so important to know and plan for. I’ll send her this article 🙂
Yep, always sucks to talk about it!