Knowing what happens after you pass away is essential if you are dealing with student debt. Depending on your situation, there may be several options for dealing with the debt, including having the loans discharged or forgiven. Understanding what happens to student debt when you die and how best to prepare for the outcome in the eventuality of death.
The first thing to understand is that student loan debt generally does not get discharged upon death. As a result, in most cases, if the borrower dies before paying off their loan in full, the remaining balance must be paid by their estate or co-signer. It means that if no one is willing or able to pay off the remaining balance out-of-pocket, the debt will fall into collections, possibly damaging their credit score.
Different Student Loans & Possible Implications When You Die?
For those of us who struggle with student loan debt, it can seem like a never ending cycle – and one that we may not be able to escape even in death. But what exactly happens to our student loans when we die? Let’s take a look at how different types of student loans are treated, the possible implications for your estate and survivors, and some tips on minimizing the impact on your loved ones.
1. Federal Student Loans
The US Department of Education states that federal student loan debt will be discharged automatically upon the borrower’s death. It includes both direct loans and FFEL Program loans such as Stafford or Perkins loans. Suppose the borrower has a Federal Direct Loan or FFEL Program Loan and dies before entering repayment, the loan will be canceled and discharged upon receipt of proof of death from the executor or next of kin. Similarly, if a parent borrower dies before entering repayment on their PLUS Loan (assuming they have completed all necessary paperwork), that loan can also be dischargeable. Remember, the Department requires some documentation, such as a certified copy of a death certificate, to discharge the loan.
2. Private Student Loans
Unfortunately, it is not as simple with private lenders. Most private lenders do not have clear policies regarding what happens to student loan debt when a borrower dies. Generally speaking, private lenders will require a co-signer to discharge the debt after the borrower’s death; otherwise, they may require payment from your estate or survivors. It’s important to note that some private lenders provide special “death discharge” clauses in their agreements, allowing them to waive any outstanding balances upon proof of death. As such, check with each lender to see their arrangements and how they handle this situation or consult an attorney.
Implications For Your Estate And Survivors
It is important to remember that any unpaid debts, including student loan debt, can impact your estate or survivors when you pass away. Depending on where you live and state laws, outstanding debts can reduce inheritances from wills or estates; if no funds are available, creditors may pursue legal action against surviving family members named co-signers on the original loan agreement. It is essential that you discuss these issues with your family so that everyone is aware of potential implications.
Bottom Line
Every situation regarding student debt after death is different, requiring careful consideration as to how best to handle it. In most cases, though, student loans are not discharged upon death but must instead be paid off by either the estate or co-signer of the deceased borrower, or possibly even waived by a particular “death discharge” clause in a private lender’s agreement. While this can seem daunting at first glance, understanding your rights and preparing ahead can help ensure your peace of mind now and long into the future, no matter what happens.