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.
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).
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?