This is what happens to your student loan debt when you die

Student loan debt has become a big problem in a country, and why wouldn’t it be when 43 million people owe almost $1.6 trillion in student loan debt? When a debt load of such a huge amount is hovering over your shoulder, you may think that you’ve to make payments until your death. But is that the end of the story? Maybe or may not be.

Much depends on the type of student loan you have borrowed and the mindset of the lender.

What is the first step you have to take?

Check out what type of loan you have. If you have a private student loan, then the implication will be different. And, if it’s a federal student loan, then the consequence will be something else.

What happens to private student loans when you die?

It depends on what is written in the loan agreement. In most cases, loans that you have taken out in your name are forgiven when you die. So it’s better to ask the lender about the death discharge policy before borrowing money.

What happens to federal student loans when you die?

In this case, I must say that the US government has a broad heart. When you die, your federal student loan debt is also discharged. There is no need to make further payments on the loan. Someone from your family has to submit the original or copy of the death certificate to the loan servicer.

In case of Federal direct PLUS loans, the same rule is applicable. If the parent borrower or the student dies, then the original or copy of the death certificate has to be submitted to the loan servicer.

What about the co-signers?

Well, they are also responsible for student loan payments after you die. If you die, then the co-signer has to repay the loan unless something else is written in the agreement.

Here, a special rule should be mentioned, and that is the Economic Growth, Regulatory Relief and Consumer Protection Act . As per this Act, all loans that have been borrowed after November 20, 2018, have to release the co-signer when a student dies. If the loan was issued before that date and there is no death discharge policy, then there is another option. It is called a compassionate review whereby your loan could be forgiven or the obligation of a co-signer could be released.

How IRS deals with it

Just like the federal government, the IRS also becomes quite generous after the borrower dies. They don’t impose any tax on the forgiven student loan debt. The Tax Cuts and Jobs Act of 2017 made discharged student loans exempt from tax. And, this law is applicable until 2025 for both the private and federal student loans.

3 Steps you can take to protect your loved ones

If you love your family and wish to protect them from unnecessary hassles, then here are a few steps you can take.

1. Pay off student loan debt: If you want to safeguard your family from any unnecessary hassle, then try to repay your student loan as soon as possible. In case of federal student loans, there are lots of options. This includes deferment, forbearance, income-driven repayment plan, teacher loan forgiveness, state-sponsored repayment assistance programs, etc. You can also consolidate your student loans or refinance them.

2. Inform your family: Inform your parents about the type of federal student loan you have borrowed and the name of the servicer. Explain to them how they can contact your parents. I know it’s difficult to talk about your own death to your parents, but you need to do this tough task. Your family members need to know where they have to submit a death certificate if you die.

If you don’t wish to discuss it with your parents, then there is yet another thing you can do. You can appoint someone else in your family to submit the death certificate. In fact, you can appoint the person officially in your will.

3. Opt for the death discharge policy: When you’re considering a private student loan, ask the lender if he offers the death discharge policy. If he doesn’t, then you have 2 options. Borrow from someone who offers the death discharge policy to relieve your co-signer and yourself. Borrow from the same lender without getting any additional protection after your demise. I feel the first option would be better for you.

Final notes

Now that you know what happens to your student loan debt when you die, take precautionary steps to safeguard your loved ones, the co-signer, and the estate. Logically, they shouldn’t suffer just because you’re no more in this world.

Can You Convert Unsecured Debt To A Secured Debt And Vice Versa?

Hey there! Are you planning to borrow money?

Most likely, you will have to make a decision about taking out a secured loan and an unsecured loan!

What is an unsecured debt?

As the name implies, it does not require any security. In other words, this type of debt has no collateral backing. If you default on this debt, the creditor can file a lawsuit against you to collect the owed amount.

One of the common examples of an unsecured loan is a credit card! Usually, the creditors offer you a credit line based on your creditworthiness and promise to repay.

Besides, your credit score and debt-to-income ratio play an important role to take out an unsecured loan. That’s why banks charge a higher interest rate on these loans.

What is a secured debt?

Creditors offer secured debt, backed by a collateral, to reduce the risk of lending money to you. If you default on repayment, the creditors can seize your collateral and sell it off to repay your debt.

It can be easier to qualify for a secured loan. The reason being, the creditors have the assurance that they will be able to recover the amount in case you default.

But how can you convert a secured debt to an unsecured one?

  1. Paying off your car loan with a credit card

    Yes, you heard it right! You can pay off your car loan with a credit card. You might think that since auto loan is a secured one, how will it be possible to pay off with a credit card?

    It’s possible! It solely depends on your lender whether or not he/she accepts credit card payments. Some lenders accept credit card payments but with a hefty processing fee.

    You can opt for a credit card that has 0% APR (Annual Percentage Rate). You can transfer your auto loan balance to the credit card. Doing so, you can repay your auto loan with 0% interest rate!

    But usually, credit card companies offer a 0% APR for a limited time. So, try to pay off your debt within that introductory period.

    Thereby, you are converting your secured debt, i.e, auto loan to an unsecured credit card! And you can save money on the interest payments, if you can repay within the introductory period!

  2. Transforming your secured credit card into an unsecured one

    Let’s say, you have no or very low credit score. But you need a credit card! So, what will you do then?

    The solution is to opt for a secured credit card! With such a card, you will have to deposit some assets as collateral for the creditor.

    Well, you might be thinking that credit cards are usually unsecured ones. Then why are you keeping collateral for taking out a credit card?

    Buddy, as you have a very low or no credit score, you don’t have anything to show your creditworthiness!

    But if you can establish responsible behavior while using a secured credit card, you can qualify for an unsecured one!

    Yes, you can convert your secured debt into an unsecured one! You have to charge your credit cards for small amounts. And make sure to pay off your outstanding balance amount in full and on time, within the grace period

    Your creditor might be satisfied if you make the minimum payment only. But your goal should be to pay off the whole amount you have charged in that billing cycle.

    If you continue doing so, your credit score is likely gonna improve. And the creditors might offer you an unsecured credit card!

    Well, let’s say, you have got qualified to opt for an unsecured credit card and you are using it! But due to some financial crunch, you have fallen prey to the debt trap!

    Then what is the solution?

    The best way to convert your unsecured credit card debt to a secured one is by consolidating your debts by a Home Equity Line of Credit (HELOC).

    It is also known as a “second mortgage” as you are taking out an additional loan on a house that already has a mortgage.

    When you take out a HELOC, you are borrowing from the bank keeping your home as collateral. Like a credit card, it is a revolving loan.

    However, unlike a credit card, a HELOC comes with a time limit! It means that you can borrow money for a certain period like 5 to 10 years, known as the “draw period”. During this phase, you can withdraw money upto your credit limit only by making the interest payments on the principal amount!

    After the draw period is over, most of the HELOCs will have a repayment period of around 10 to 20 years. You have to make regular payments for the principal and interest until your loan is paid off!

    But you know what?

    With a HELOC, you are borrowing against your home equity (the value of your home – the amount you owe on your primary mortgage). In other words, you are taking out a secured loan to pay off your debt! So, you have to keep in mind the following things:

    • (i)You might lose your home if you don’t make payments as your home is the collateral.
    • (ii)You need to have certain equity to opt for a HELOC. Usually, a HELOC can let you borrow up to 85% of your equity!
    • (iii)Most likely, you will need a debt-to-income ratio in the lower 40s and a credit score of 620 or above to take out such a loan. Besides, the value of your home should be at least 15% more than you owe.

    However, it is somehow better than an unsecured personal loan. Usually, HELOC interest rates are variable. That means, they are based on the Prime Rate plus 1% or 2%. The average HELOC interest rate in August 2019 was around 6.57%. As you can see, the interest rate of HELOC is comparatively lower than that of an unsecured loan!

    So, you can consolidate your high-interest unsecured debts by using a HELOC as it has a lower interest rate! And thereby, you can certainly save money on interest payments by converting your unsecured debt into a secured one!

    So, as you can see, you can convert your unsecured debt into a secured one and vice versa. But you have to keep the important things in mind which are mentioned in this article.

    And don’t forget to let us know about your experience!

How to ditch debt – 6 Amazing tips to get success

Having debt is the worst financial issue a man can ever face in his life. If you have too much debt on your shoulder and can’t make regular monthly payments, it is possible that you might face financial issues. It is because you might be contributing a major part of your income towards monthly payments on debts and that’s why you can’t manage your monthly budget. Apart from that, growing interest rates can also become a burden and increase your debts. So what are your options? Is it possible to ditch your debts? With a solid plan and a lot of hard work, you can get out of debt and get back to a secure financial path.

If you have any confusion about how to start, let me help you with 6 amazing tips to ditch your debt and become debt free.

1. Stop building more debt

Avoid most of the unsecured debts. You may accept some unavoidable ones like the student loan as it is necessary for your education. Avoid applying for new credit cards, any payday loans, personal loans, etc. Hide your credit cards and consider freezing your credit for the time being.

Staying on track with your credit card payments is necessary for you. If you miss a payment, your next payment due will be much higher. Additionally, you’ll be charged a late fee. That will put a load on your monthly budget, and make you use your credit cards again.

2. Analyze your situation

Analyze your financial situation by comparing your income vs expenses. Prepare a list of your debts, your creditors, the amount you owe, the minimum monthly payments, and the interest rates. In the end, determine the total debt amount that you need to pay off.

3. Decide your strategy

There are two popular ways to get out of debt, they are:

  1. Snowball method – You need to list your debts from smallest to largest, considering debt amounts. Pay off the smallest debt first and after that shift your focus on the next smallest debt. Don’t forget to make other minimum debt payments, ever.
  2. Avalanche method – You may prepare a list of debts from the smallest rate of interest to the highest rate of interest. Pay off your debts by focusing on the highest interest rate first. Practically, you’ll save a big amount in the long run from interest payments.

These debt repayment strategies are quite helpful to get debt relief no matter what amount of debt you are carrying now.

4. Make a tight budget

You may need to cut expenses from eating out, shopping, travel, entertainment, etc. You need to find hacks to spend less. Use gift cards instead of giving money or other gifts in case you get any invitation. Start shopping from thrift stores. If you have a big place to live, get a roommate. If you can manage your transport, sell your car. Having an emergency fund can make you more confident to handle debts and become debt free. It is because you’ll have enough money in your hands to handle any kind of monetary crisis other than your debts.

These strategies are quite challenging. You can’t do this if you don’t have a strong mind to follow this path and become debt free.

5. Consider side hustles to earn extra money

You can work part-time or provide full-time freelance services. You can teach painting, music, languages, and even arts and crafts. If you are a health freak, you can work as a part-time gym trainer too.

If you have an interesting hobby which can earn you good money, go for it. Try any means possible to get extra money and put that amount to pay off your debts. This way you can ditch your debts sooner than usual.

6. Always track your progress

Ditching your debt is difficult and you can’t be the winner in one day. It takes a lot of hard work, commitment, and mental strength to achieve this success. So, it’s important to track how fast you are approaching your goal. You’ll be motivated if your pace is good and your debts are getting paid off properly. Make sure to reward yourself in a budget-friendly way as soon as each debt balance hits the bottom.

Endnotes

Paying off debt is crucial for building a good financial profile. You may find difficulties to save for retirement if you have huge debts on your shoulder. That’s why you must follow a plan to get out of debt as fast as you can.