Every month it creeps up on me, like a thief in the night. With its beady eyes and quick talons, it takes what, yes, technically belongs to it, but it does so without remorse, without compassion. It’s hungry and thirsty and it takes, takes, takes and leaves me — and forty million other Americans — penniless and shaking in its wake.
I’m talking about student loan debt, of course, and the financial gouge that so many of us face on a monthly basis. And unless you completely pay it off as soon as possible, don’t expect those monthly payments, disturbingly high interest rates, and incessant calls from student loan debt collectors to stop any time soon.
But what if you die? Morbid, yes, but think about it. What happens to your student loan debt if something happens to you? Will your loved ones have to pay it when you’re gone?
Federal student loans v.s. private student loans
"If you have federal loans, your debt will die with you," says Leslie Tayne, financial/debt attorney of Tayne Law Group, P.C. and author of Life & Debt. If the loan is federally-backed, the debt is cancelled and no one is liable for it.
However, if your federal loans are Parent Plus loans, although they’ll still die with you as the borrower, your parents will most likely have to provide the loan servicer with acceptable documentation of your death, like the original, certified, or photocopied version of the death certificate. (With these loans, if the parent dies, the loan also dies.) And with Parent Plus loans, your parents may also get hit with a large tax bill on the loans, says Tayne.
Private loans can be a little more complicated—depending on whether or not they’re co-signed—we’ll break this section into two parts.
Private loans without a co-signer
"If you have a private loan and did not need a co-signer, then some lenders like Sallie Mae or Wells Fargo will let the loans die with you," says Tayne. "However, other lenders may be able to go after your estate for the remainder of the loan (in which case your family could try to sue and argue this issue on your behalf)." If you’re married, however, watch out — even if your spouse didn’t co-sign the loan, some lenders may hold them responsible for your loans if you die. Check with your lender and your state laws to see if this applies to you and your spouse.
Private loans with a co-signer
"Cosigners assume the responsibility of making payments in the event the original borrower cannot make the assigned payments," explains Sean Stein Smith, CPA, member of The American Institute of CPAs’ National CPA Financial Literacy Commission. "If the borrower were to pass away, the responsibility to assume payments for whatever debt was left outstanding might very well fall on the co-signers." Because your co-signer is legally responsible for your debt while you have the loan, he remains legally responsible for it if you stop paying it, it’s sent to collections,or you die. And if you die, then your co-signer will be responsible for paying your loans — maybe even immediately — explains Tayne. (Because of this, it’s so important that parents buy their children life insurance — more on that in our guide to life insurance for student loan co-signers.)
Fortunately, if you’re reading this and freaking out because you’re the co-signer, there are options: "You can apply for a co-sign release," says Tayne. "You and your lender can come to an agreement where if you [as the co-signer] make payments on time every month for a certain period of time (sometimes they negotiate for 2 to 3 years), your name can become released from the loan, leaving the original borrower on the loan fully responsible. If you are released from this loan and the original borrower passes away, then the debt will die with the original borrower, leaving no one else responsible for remaining payments."
Always check with your lender
That being said, since private loans vary by lender (and by state), it’s important to speak directly to your specific lender so you and your family can know for sure what would happen to your loans if you died.
"One of the most under-appreciated rights of living in the United States is how this country handles debt after you die," says Howard Dvorkin, CPA, Chairman of Debt.com. "In other countries, and in olden times, your family was responsible for paying off whatever you didn’t—sometimes immediately. This could burden a family for generations. One thing to remember, however: While you might be dead, your estate lives on for a little while. Lenders can line up to get a slice. So while your family might not have to pay your debt, they probably won’t inherit anything either – not if you owe more than had when you passed."
The best way to protect your estate from debt — student loans, mortgage, or otherwise — is to buy life insurance. Life insurance provides a lump sum of cash to your family (or co-signers) so that they can pay off your debts and protect your estate.
When it comes to student loan debt, do your due diligence, research your lender(s), and ask questions to protect your family. It’s important to make sure you know all of the policies, rules, and regulations of your loan. And if you are suffering from a terminal illness then it’s especially smart and beneficial to contact your lender, financial attorney, and/or debt counselor to ensure you understand all the terms and options of your student loan. The more you know, the more you’ll be prepared.
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