As an estate planning attorney, I spend a lot of time talking with clients about their finances, including their debts. It’s important to ensure - no matter what type of debt you have - that your family will not be stuck repaying it if something happens to you. Student loans aren’t just a concern for those just out of college- millions of Americans 50 and older have student loans, and millions of parents have taken out loans for their children or co-signed on their children’s loans.
How widespread is student loan indebtedness? More than forty-one million Americans have student loan debt, with the average borrower owing nearly $30,000. And New Hampshire has been ranked as the state with the highest student loan burden - the average New Hampshire student loan burden is the highest in the nation, at $33,410. 76% of college students in the state graduate with debt. (Massachusetts comes in lower, at $29,310 and 65%.)
So what happens to your student loans when you die? And what should you do to protect your family?
There are two kinds of student loans: federal loans, which are guaranteed by the federal government, and private loans, which are not. The effect of the borrower’s death impacts each type differently.
Federal loans will be discharged if the borrower dies. The student’s family or whoever is taking care of the student’s affairs must submit a certified copy of the death certificate to either the student’s school or the student’s loan servicer.
Private loans are a lot trickier. Many parents co-sign private loans for their children, which means that if the child dies the parent will be expected to repay the loan. Even worse, the death of the student can trigger default, meaning that the whole balance of the loan could be due immediately.
Private educational loans are sometimes discharged, but that depends on the lender and the loan, so it's best to look into your specific loan documents. Wells Fargo, for example, offers loan forgiveness to a co-signer when the student has died or become permanently disabled. Even if your lender is not listed as one that offers death discharges, your family can request that the company holding your loan forgive the loan.
Anyone seeking loan forgiveness from a private loan should be careful- the amount the lender forgives could qualify as taxable income, so it’s best to consult a tax professional before doing this.
This all assumes that your family knows who holds your loan. Many private student loans are sold and re-sold, much like mortgages. It can sometimes be hard to know who actually owns your private student loan debt. (If you need to figure this out, take advantage of a free credit check to find your lenders.) These companies do not always, or even often, offer forgiveness of these private student loans, whether or not there was a co-signer.
If you have private student loans without a co-signer, the lender could look for payment of your loans through the probate process. When a person dies with debt, the creditors have the opportunity to collect the amounts owed to them from the probate estate. This means that, if you have an unpaid student loan when you die and that loan is not forgiven, the lender can file a claim against your estate looking for repayment. That repayment would come from the assets you leave behind- your house, your bank accounts, your investments. This obviously has an enormous impact on those you leave behind.
I have no solutions for the broader student loan crisis, but there are a few simple steps you can take to protect your loved ones from your student debt.
1. Get insured.
If you have a lot of private student loan debt, whether or not you have a co-signer, the easiest solution is to take out an affordable term life insurance policy to cover the amount of the loan. Talk to your financial advisor to determine your exposure to student loan debt and determine the appropriate amount of life insurance coverage.
2. Think carefully before acting as a co-signer on a loved one’s loans.
Co-signing seems like an easy enough way to help out your loved one when they need help, but doing so puts you on the hook for the entire amount of the loan- no matter why the student is not making his or her payments. If you must co-sign a loan, take out an inexpensive term life policy on the life of the student to ensure that, if the student dies unexpectedly, you will not be stuck with a huge bill you can't pay.
3. Get organized.
When someone dies, their family will need to know about their finances in order to settle their affairs and, if necessary, deal with student loans. Make sure your loved ones have access to a list of your bank accounts, credit cards, and monthly bills. This doesn’t have to be terrifically detailed, but a simple list of what student loans you have from which lenders and what your monthly expenses are can help immensely in a stressful time.
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