Benjamin Franklin said nothing in this world is certain except death and taxes. While this statement is extremely accurate, particular student loan borrowers and their families are learning something else is certain. For some student loan borrowers and their loved ones, full loan balance payments are also certain.
While death discharges or wipes out student loan debt for some borrowers, not all loan lenders provide this relief. Upsettingly, the majority of borrowers are not certain whether the terms of their loan honor discharge by death or if death accelerates the entire loan balance payment. A survey composed of 400 borrowers concluded that 73% of student loan borrowers don’t know what happens to their debt following their death.
Federal Student Loans
A federal student loan is a student loan provided from the federal government. The government pays the interest until repayment occurs. The terms of federal student loans include requirements such as the student must maintain a certain academic hour caseload.
In the event a borrower fails to uphold the loan requirements, federal student loans are flexible in the sense that they provide a six-month grace period before payments with interests will become due.
Federal student loans in the borrower’s name are cleared through what’s called a death discharge. A friend or family member of the borrower sending proof of death or the borrower’s death certificate to the loan servicer initiates the death discharge procedure.
Parent PLUS Loans
Parent PLUS loans are loans where the parents of the student take out the loan, with no responsibility to the borrower for repayment. Upon the death of the parents, the loan is discharged by the government and treated as regular student loans. The death of the student results in the loan being forgiven.
Until 2018, debt was treated as taxable income. In 2018, President Trump signed the Tax Cuts and Jobs Act of 2018, which forgives student loan debt of dead or severe (life-altering) disability without tax consequences. This relief, however, is terminating in 2025.
Private Lenders
Student loans provided by private lenders are not as flexible and forgiving as federal student loans and parent PLUS loans. While most private lenders offer some sort of relief plan to families of deceased students, government death discharge protection is lost. Further, the relief plans are granted on a case-by-case analysis basis.
Loans Affected by Death
Even if a borrower is current and on time with their loan payments, the death of the borrower’s co-signer can cause the loan to go into automatic default. Thus, the full loan balance can become accelerated and immediately due.
If a married spouse takes out student loans, the non-borrower spouse may become responsible for the loan balance in community property states. Community property states pool all assets and debts together, and consider it property of both spouses. Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Alaska (optional), Washington, and Wisconsin.
Protect Your Loved Ones
Taking preventative measures and ensuring financial backup support resources are available and accessible are the best ways to protect your loved ones from financial hardship due to loan balances.
1. Understand student loan terms and conditions
Before you and your co-signer become obligated to a loan, make sure you both understand the policies, terms, and conditions of the loan. Take extra caution as to how the terms handle death and severe disability of the borrower or co-signer. If you or your co-signer have any questions, ask the loan servicer.
2. Inventory Sheet
Just as an inventory of your property must be assessed when you die, an inventory of your financial obligations should be assembled for evaluation upon death. Providing an inventory of your loan obligations with correlating information eases the stress of your loved ones handling your posthumous affairs.
3. Remove Co-Signers
If after making regular payments, you have reached the point where you are financially stable enough to take control of the loan repayments, remove your loan co-signers. Co-signers can be removed by having the co-signer and borrower complete a release form; or by applying for re-financing excluding the co-signer’s name on the application. Requests to remove co-signers are usually granted after the borrower has made on time payments for a period of at least one year, has good credit, and meets income threshold requirements.
4. Life Insurance
In the unfortunate event that a loan’s terms permit the balance to become immediately due upon death of the borrower or co-signer, life insurance policies are excellent tools to quickly pay off the balance.
Term life insurance is best for loan repayments because they cover the beneficiary for a specific period of time. The usual period of time is 10 years, 20 years, or 30 years.
While student loans serve the purpose of providing quality education for students, it can quickly become a strong source of stress after completion of the educational program.
The most important steps you can do is to thoroughly understand the terms of your loan before signing, and implement financial safety measures as soon as possible.