What happens to student loans when you die?

Have you thought of how an unpaid student loan can affect your near and dear ones if in case you died an unexpected death? This article gives you tips on what to be done to ease your student loan debt, in case of the borrower's death.

Updated by Theres Ann on 5th September 2019

Student loans are the greatest burden when it comes to education. The thought of repayment is such misery which eliminates the joy of learning. Some borrowers look for the fastest repayment plan and some other borrowers look for the h2owest monthly payment. Most student loan companies offer several favorable policies that can attract borrowers to take up a particular repayment plan.

However, have you ever wondered what would happen if the borrower dies, leaving behind his/her unpaid loans? Throughout this article, the light is thrown on the possibilities of loans that remain unpaid even after the borrower dies.

When you reside in a community property state and if your spouse dies, you are liable for your spouse’s debt with less regard on whether your name was on the original loan or not.

States such as Wisconsin, Texas, New Mexico, Washington, Idaho, Nevada, Louisiana, California, and Arizona are the community property states. An optional community property provision is granted in states of Alaska for couples who choose a community property agreement.

The rules vary for different student loans. The spouse’s liability will be based on the student loan, residence in a community property state or your individual state laws.


Table of contents


Federal student loan debt discharge after death

For Federal student loans, the spouse cannot be held responsible for loan repayment. The US Department of Education suggests that in case of the death of a Federal student loan borrower, the loan is automatically canceled and hence the government discharges the debt.

The liability protections are not offered by private student loans.

Federal student loans after death without a co-signer

If you have a Federal student loan then your property does not need to be held as a mortgage. The Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct Consolidation Loans are included within the above-mentioned provision. Before your debt is discharged, some representative of your family member needs to present a proof of death.

The record of death includes the original death certificate, a certified copy of the death certificate, an accurate and complete copy of the one of the above is needed. This record must be submitted to the loan servicer.

For Federal Perkins Loans, the record of death is submitted to the school as the school acts as the lender in this case. The exception would be the location of the presence of the loan servicer because the record ultimately reaches the loan servicer.


Federal student loans after death with a co-signer

Federal Student Loans usually do not need a cosigner. The rate of federal student loan is not even dependant on your credit history which has been set by Congress.

Direct PLUS Loans are however an exception. These loans cannot be received with an adverse credit history. In that case, you need to seek an endorser, also known as a co-signer. This will enable you to qualify for Federal Student Loans. Even though your loans have a co-signer, after your death your Direct PLUS Loan is still discharged.


Parent PLUS Loans debt discharge after death

Parent PLUS Loans are offered by the Federal government. However, the parent who borrowed the loan is responsible for the same, instead of the student. The debt is dischargeable in case the parent or the student for whom the money was borrowed dies.

However, if the loan was taken by both the parents out of which one has died and the student is still alive, then the surviving parent needs to pay the student loan. The record of death must be submitted for other student loan discharge.


Private student loans debt discharge after death

In the event of a spouse’s death, it will completely depend on individual private lender policies. It will definitely be a good idea to clarify it with the private lender. In case they offer any death discharge protections. Death and Disability forgiveness policies are also offered by some companies such as Sallie Mae’s Smart choice Student Loan, New York HESC’s NYHELP Loans, and Wells Fargo Private Student Loans.

For Private student loans, the lenders will first try to collect money from the borrower’s property. In the case of lack of a property, an attempt is made to collect money from a cosigner. Then it falls into the spouse hand and depends on the community property laws in your state. Exceptions are offered to community property states for education debts so that the spouse is not held liable for debts until they become the cosigners.

By living in a community property state, you can check into the laws to confirm if your state has an exception. In case you are not a co-signer and you do not reside in a community property state, then you needn’t worry. There can definitely be tax repercussions on forgiven debts including student loans that are canceled due to death or disability.


Private student loans after death without a co-signer

Private student loans are not forgiven like Federal Student Loans. The discharge of private loans after the death of a borrower would completely depend on the student loan contract. Upon the death of the borrower, many private student loans are forgiven

If you have serious plans of borrowing a private student loan, you need to check the terms regarding death and disability discharge. No one else will be responsible for repayment until the co-signer is.


Private student loans after death with a co-signer

Most often the lender’s credit requirements are satisfied only with a co-signer. The co-signer would definitely be responsible for the non-repayment of your loan. Moreover, cosigners are not released from a private student loan.

If the loan contract does not guarantee the discharge of loans after the death of the borrower, then the co-signer will be responsible to pay off your loans. Lenders such as Sallie Mae and Wells Fargo will discharge student loan debt once the borrower is dead.

Upon the improvement of your credit rating, the co-signer can be relieved from the responsibility of paying off your student loans. Private loans can also be refinanced in your name in case you have an acceptable credit history.

If you are left with no other option then you can also refinance your loan with the help of a cosigner. Another possibility is to request your co-signer to be released from the obligations. But most often 90% of these requests are rejected. Cosigning a loan is a great responsibility and no co-signers should take it so lightly.


Seeking forgiveness for private student loans

Private student loans are rarely forgiven or discharged. You can find if a loan qualifies for any type of forgiveness if you are concerned about leaving your student loan debt to someone. There are not many forgiveness programs for private student loans, but you can look for other options of debt relief. 

Forgiveness programs, interest-only payments, forbearance, negotiation of lower payments, disability discharge, bankruptcy, and refinancing are a few methods to get rid of private student loans.

The first step in seeking forgiveness for Private student loan programs is to negotiate with the lender. Refinancing of student loans is another possible opportunity. You can also try optimizing your Federal student loans.

You also frequently need to check on updates of Private student loans. Finding new ways to increase your income is another possibility that is available.


Marriage and Debt Discharge

Everyone has their own baggage when they get into the union of marriage, but taking the baggage of student loan debt brings up another level of complexity. But is this complexity enough to stall the ' I do'? Let's evaluate the situation. The key factors to focus on are - 

  • Is a spouse responsible for the debt that was incurred before marriage?

  • Should you get into loan repayments as a team or go about individually?

Handling finances

Marriage is wonderful, however, debt is a burden. A key factor of consideration for debt discharge for a married couple would be how they handle their finances. Hence, here are the 3 main ways through which couples handle their finances - 

  • Individual finances 

  • Merging finances 

  • A mix of personal accounts and joint accounts

If you believe in handling your finances separately then you should go ahead with the individual finance model where a spouse handles the debt repayment individually. In a mixed way of handling, people have personal accounts and a mutual fund containing money from both partners.  Merging finances, however, is teamwork till the end. Hence, here is a quote that could motive you - 

"In sickness, health and in debt" 

- Jason 'JMAN' Manoj

Your spouse can help you with your debt but unless she/he is your co-signer as per the contract she/he is not legally obliged to help you with your debt. The type of finance model you go ahead with is a personal choice but it is always good to consult a financial advisor in case the choices and the numbers are overwhelming. 

Community property state

Although your spouse might not be the co-signer there are chances that they will be responsible to repay your loan upon your death. This is the case in a community property state. If you take out a loan when you are married then in a community state your spouse will be responsible to help repay the loan, the key here is 'when you are married'. If you take out the loan when you are single then your spouse is not responsible for the repayment.

The community states in the US are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

The state laws and the type of loans would clearly decide if your loans without a co-signer would have to be paid by your spouse in case you die.

Private student loans are not dischargeable, if you live in a community property state and the loan was borrowed after you were married, your spouse may be responsible to repay your loan. As laws vary from State to State, a local student loan lawyer will be able to guide you better in this case. Read more - Affect of marriage on student loans 


Student Loans that don't go away even if a person dies

There are two types of loans that do not die along with you.

  • Private Student Loans with a co-signer do not die. Upon cosigning the loan, the co-signer is just responsible for the loan repayment same as the student or the borrower. It means that even if the borrower dies, the cosigner has to repay the loan.

  • The case is different for PLUS loans. Even while the loans are technically discharged, due to the death of the borrower, the parent of the borrower will be left with 1099-C which increases your income and makes you pay for the amount that was forgiven. 


How to choose a loan with the best debt discharge policies?

The type of loans you have, the state in which you live in, and many related factors determine the best debt discharge policies. It is thus necessary to go thoroughly and learn the death discharge policies of the lender before you take up your loan.

The National Student Loan Data System (NSLDS) can be contacted to know about the services and their related policies. In the case of any outstanding debt, a co-signer release or a life insurance policy would come to your rescue.

Payment simplification would be possible by gathering all loans to one place and then considering federal loan consolidation or student loan refinancing. Considering all the possibilities of loan choice can save your family from financial trouble, in the case of an unexpected occurrence.

Tips to deal with debt-discharge problems after death

Tips that would help you in tackling debt related problems are given below.

1. Don't co-sign the loan - The first tip is to not cosign for a loan. Student debt is the worst debt to have. If the borrower unexpectedly dies, the burden of debt would pile up on all the grief that the co-signer is going through. So try to not borrow private loans, instead stick on to the budget, of what you earn from Federal Student Loans.

2. Check life insurance -  Secondly, consider taking out life insurance on your college student loan, till the debt for which you are liable is gone. If a loan is cosigned for $20,000, a life insurance policy worth $20,000 can be purchased. Though the policy would be extremely inexpensive, the insurance money would be paid to the outstanding debt.


Conclusion 

" Is your spouse responsible for your debt?" again the answer to this isn't binary, it depends on the state and when the loan was taken out. Everyone deserves to live happily ever after, in that sense, it is always good to discuss and come up with a plan of action to get the student loan debt burden out of the way. Be aware of all the possible scenarios and keep the plan of action to go for ready.