It has been said that the only certain things in life are death and taxes.
Americans can now add student loan debt to that list. As of January 2021, some 45 million Americans owed a total of $1.71 trillion. That is about $739 billion MORE than the total U.S. credit card debt. 69% of college students took out student loans and they graduated with an average debt of $29,900.
When you consider the fact that nearly 70 percent of students in college have them, it can be argued that student loan debt has become a fact of life in the United States. This raises the question; what happens to student loans when you die?
Well, some die with you, but others don’t.
Private Student Loans
Disposition after a death varies by lender. In a lot of ways, private student loans behave more like traditional personal loans. Lenders could well come after your estate upon your death to seek reimbursement. This means your heirs could lose part of their inheritance.
The good news is liability usually stops with the estate — when a loan is in your name only. However, if you took the loan while married and live in one of the community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), your spouse will have to repay the loan — even if they didn’t sign for it.
On the other hand, if you took the loan before you were married, your spouse will generally be held harmless, unless both of you signed for it, in which case your spouse will be held liable for repayment.
Ditto for cosigners! These people agreed to be legally responsible for the repayment of the loan, and your death won’t let them off the hook. Further, your demise could trigger the default clause some loan agreements have, which would mean the entire balance becomes due all at once.
Debt Settlement Could Help
If this happens to you and you can’t afford to pay, consulting a debt relief firm to see what you could do to settle the debt is a viable option. Because they behave like unsecured personal loans, most private student loans could be settled with a debt relief plan. However, you should look for background information like these Freedom Debt Relief reviews, to ensure you’re working with a capable organization.
Federal Student Loans
These obligations die with you, assuming your surviving family member presents a certified death certificate to the company responsible for servicing the loan. Parent PLUS loans also die with the student or the parent.
In the case of these instruments, the parent is the borrower, rather than the student, so they go away when either the parent or the student perishes. However, if a Parent PLUS loan is forgiven because of the death of the student, the parent will be looking at a tax bill when the debt is canceled.
The IRS considers the amount of the loan the parent is relieved of repaying as income. The lender will issue an IRS Form 1099 C reporting the forgiven amount as taxable income.
Which brings us back to the fact that the only things certain in American life are death, taxes and student loan debt. And, when it comes to a Parent PLUS student loan, all three can happen at the same time.
Understanding what happens to student loan debt when you die is key to protecting your family and your estate. Far from being a straightforward situation, there are many nuances to consider.
These include the type of loan(s) you have, in which state you reside and whether or not you had cosigners. As always when it comes to things financial, you’ll do well to read the agreement carefully before you sign any dotted lines.