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.
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.