To think about one’s own death is like stepping into a blood-curdling maze. This endless pit of self-introspection brings out nothing fruitful. It’s just those daunting thoughts and made-up scenarios that end up with you being in the coffin.
This time, however, thinking about death got our bearings running—what happens to your student loans when you die? Do they die with you? Or they live long enough to haunt your family like that petrifying ghost of textbook’s past?
Congratulations, you’re now scared of death as well as debt.
Don’t worry—it’s not as scary as it sounds. Although we’d prefer staying in a haunted house for the night rather than living with student loans throughout our life, what happens to student loans when we die is not that intimidating.
To put it into perspective, what happens to your student loans when you die is very dependent on your type of loan and where you live. 44 Million Americans are being suffocated by student loans. Here’s how you make sure that student loans don’t take you down.
What Happens to Student Loans when You Die?
Student loans stick with us for long times to come, and it is tragic to think about kicking the bucket before paying them off. Why, you ask? Well, because the Ghost of Student Loan might hover on your family once you leave.
Let’s look at all possibilities in case of different loans to figure out what happens to your student loans if you die.
Federal Student Loans—the Guardian Angel
If you get out of this planet with federal loan student debt on your back, congratulations—you don’t have to think about that loan burden anymore. Once the student passes away, federal student debts on his/her name are discharged.
This is the simplest procedure, balanced—just as things should be. Scammers, however, are omnipresent to make the most of this clause in the federal student loan contract, and that is why the discharge has to be legally confirmed.
What your family has to do to discharge your federal student debt? Your survivor(s) have to bring forward the following documents to the loan servicer:
- Original death certificate
- Certified copy of the death certificate or
- A lucid Xerox of any of above
Federal student loans don’t require cosigners, so the procedure is simple in case the student loan borrower dies—the loan dies with him/her.
Parent PLUS loans—the Taxable Priest
Parent PLUS loans are federal loans in themselves. In these loans, however, the parent agrees to pay on behalf of the dependent student, hence the name. Parent PLUS loans aren’t given to borrowers with adverse credit history, making a cosigner your best bet.
Even though Parent PLUS loans have to be paid back by the parent on behalf of the student, these loans are discharged when either the student or parent dies.
Yes, Parent PLUS Student Loans are discharged on the death of either parent or the student, but the Parents immediately get a 1099-C form straight from the IRS after the debt is canceled. The discharged debt is treated as taxable income.
Even though Parent PLUS Student Loans are federal, unlike Federal loans they’re not discharged for free. The student’s parents would have to brace for a huge tax bill from the IRS.
The Private Student Loans Conspiracy
It gets a whole lot tricky when private student loans come into the picture. If you ask what happens to student loans when you die with a federal loan, there’s not much to worry. But in the case of private student loans, it’s a shady territory.
Normally, private student loans don’t give you the liberty of discharging your loan in case of death. It’s all there in terms and conditions of the loan, and you’ve got to make sure to check the terms regarding death and disability discharge.
In most cases, student loans cannot be opted for in case there’s no cosigner. If the student loan borrower dies, the lender has all the rights to go after the cosigner for the student loan money. Private student loans are just like traditional loans from private lenders.
Lenders can contact your spouse, make a move for your cosigner or even discharge the loan. It all depends on the terms of your contract because it decides what happens to your student loans when you die.
Let’s look at what happens to private student loans when you die in different cases.
1. I’ve got a Cosigner
If you’ve got a cosigner to back you up in procuring student loans, s/he won’t be having the best of time in case you kick the bucket. Your cosigner is very much responsible to pay off your debt after you die and it doesn’t matter what loan it is.
When the borrower or cosigner dies, default is triggered. Hence the survivor has to pay the remainder of the private student loan amount as soon as possible. Even if s/he has made all payments right on time without default, s/he can’t delay this one.
2. I don’t have a Cosigner
You’ll hardly find a private student loan provider who’ll grant you student loans without a cosigner’s consent. If you hit the jackpot, however, then read between the lines to figure out what’s the death and disability clause.
What happens to your student loans if you die and there’s no cosigner? You’re off the hook, unless the ghost of debt collector catches you, we can’t help there. In most cases, you won’t get a private student loan without cosigner’s backing though.
3. I’m Hitched
If you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) and you got the student loan after you were married, then your spouse will be responsible to pay back your student loan when you die.
If you opted for student loans before you got married, however, your spouse won’t have to pay back unless s/he is the cosigner.
How to Elope from the Ghost of Student Debt after Death
You have to learn how to protect your family from unexpected student debt burden in case you kick the bucket. If you or your family member has got a federal loan, you are in luck.
In the case of private student loans, do your homework. The National Student Loan Data System (NSLDS) contains records of all private student loan providers and you can check your provider’s terms when it comes to death and disability.
For cosigners, the simplest way to ensure that they don’t suffer is by getting a life insurance policy for the person they’re cosigning for. Keep the life insurance amount as high as the amount of student debt.
Most importantly, cosign on behalf of anyone responsible. Doesn’t matter if its student loans or just personal loan debt, being a cosigner is a big ask—and with great power comes great responsibility.
They might live, they might die…
But what happens to student loans when you die definitely shouldn’t stop you from bracing your family for the bumpy ride ahead. Try to pay off your student debt as soon as possible.
If the inevitable happens way before you think it will, at least you’d die in peace—regardless of what happens to student loans when you die.