If you are a student or the parent of a young adult, death is probably the last thing on your mind. But the continued spread of the coronavirus has highlighted the risk of death for many Americans, leaving millions of relatively young people with a morbid question: what will happen to my student loans if I die?
“This seems to be the theme of the day,” said Betsy Mayotte, president and founder of The Institute of Student Loan Advisors (TISLA), recalling a recent conversation with a borrower who asked her what would happen to his debt if he contract the virus and die.
More 44 million Americans have student loan debt, averaging $ 35,359, according to The data by Experian. In a recent investigation which targeted adults with student loans, over 70% said they did not know what would happen to their debt in the event of death.
The answer to this question depends on several factors, including the type of loan you have, the date it was issued, and your lender. Here’s what you need to know.
Are Federal Student Loans Forfeited Upon The Death Of A Borrower?
If you only have federal student loans, the answer is pretty straightforward. In the federal program, if a student dies, all loans in their name are canceled, Mayotte says.
The same rules apply for Parent PLUS loans. If the student for whom the loans were obtained or the borrowing parent dies, the loans must be discharged by the loan manager.
But there’s one recent development that helps federal borrowers even more: these landfills are now tax-free.
In the past, if a federal loan was canceled due to death, the student’s or borrower’s estate was responsible for paying taxes on the canceled amount. The IRS changed the rules in 2018, and the amount released after death is no longer considered taxable income.
To obtain the release of a federal student loan, a family member or legal representative of the deceased must submit an application directly to the loan manager and include a acceptable proof of death, such as the original or a certified copy of the death certificate.
A simple discharge on death is one of the many provisions available to help protect federal borrowers. This is why most experts will tell you to limit your borrowing to these types of loans.
Are Private Student Loans Forfeited In The Event Of A Student’s Death?
For private loans, things can get a bit complicated, as there can be multiple outcomes depending on the year the loan was issued, the existence of a co-signer and the rules set by the lender.
“The problem with private loans is that each loan product is different,” Mayotte explains. “Historically, for many private loans, the borrower’s estate or its co-signer, if there was one, often still got on the hook.”
Fortunately, things have changed. In 2018, Congress updated the The Truth in the Loan Act (TILA) – federal law that requires creditors and lenders to disclose to consumers, to say that if you die – lenders must release both the co-signer and your estate from any financial obligations related to student loan debt.
However, Adam Minsky, a Massachusetts attorney specializing in student loan law, points out that this only applies to private loans created after the amendment came into effect in 2018. “Older private loans do not apply. are not subject to this requirement, ”he says.
This means that if you took out a private student loan in 2015 and have a co-signer, that person could still be responsible for that debt if you die. Minsky also says that under state law, it may be possible for a student loan creditor to go after the deceased borrower’s estate if the loan was issued before the modification.
On top of that, if you are married and live in a communally owned state, such as Arizona, New Mexico, Nevada, or Wisconsin, your spouse could also be responsible for this debt if you die, even if you do. he did not co-sign the loan, as long as it was contracted after the marriage.
As with federal loans, you will not have to pay taxes on any amount discharged by the lender, regardless of the year the loan was issued. – at least for now. According to Mark Kantrowitz, editor and vice president of research at Savingforcollege.com, tax-exempt status was added to the tax law passed in 2017, and it will be in effect until 2025.
If you want to know exactly what will happen to your private loans, your best bet is to take a look at your contract to see if there is anything specified – if there are no details, don’t. do not worry. Most private lenders offer what is called a “compassionate examination,” in which any survivor can request a death waiver. There is no guarantee that it will work, but it is still an option to explore, as each lender assesses them on a case-by-case basis.
Comment from finder.com Certified Business Loan Officer Anna Serio:
What happens to co-signers on private loans
According to finder.comCertified Trade Credit Officer, Anna Serio in general, co-signers are still responsible to repay private student loans, even if the primary borrower dies. Although now a rate, it was common for private student loans to default automatically when the borrower dies. This meant that the co-signer was required to pay the balance in full.
This is no longer a common practice, but different lenders have different policies for dealing with the death of a borrower. This is why it is important to contact the manager of any loan that you have co-signed as soon as possible.
What Happens to Parents on Parent Loans
The federal government fully releases Parent PLUS loans if the parent or student dies. And thanks to a change in the U.S. tax code in 2018, the surviving party is not responsible for paying federal taxes on the remitted portion. However, state taxes may still apply, so you may have to pay a bit more that year.
What can you do?
Each private lender has their own way of handling student loan release, but you can still prepare yourself and protect those around you from your financial burden by doing the following:
Consult the conditions: The first thing you can do is look at your promissory note as this will give you a better idea of how the lender is handling these cases. The promissory note is the contract that contains all the details of the loan you have accepted, including the total amount, interest rate, and repayment terms.
“Check the grade and see what it says about what would happen if the student died,” says Mayotte. If this is not stipulated, or if you cannot find your promissory note, you can always contact the lender to obtain this information directly.
Consider a life insurance policy: If you have private student loans that were issued before 2018 then life insurance is something you might want to consider. Life insurance policies, especially term policies, cost next to nothing, especially for a young person who is relatively healthy.
David Gastwirth, senior insurance strategist at American Business, a life insurance brokerage firm, says life insurance can act as a safety net when taking out student loans to protect the estate, co-signer or spouse of the borrower in case the student dies while the loan is still in progress.
According to Gastwirth, a 10-year term insurance policy worth $ 250,000 for a healthy 20-year-old woman costs about $ 125 per year, or less than $ 11 per month.
When purchasing a life insurance policy, be sure to factor in the full cost of the loan, including interest accrued while in school and other fees. “It’s always better to have a little more than a little less,” says Gastwirth.
If you don’t know where to start, you can always contact a life insurance broker or check out an online market, such as IQ Health, to explore your options.