There are two issues many people prefer to avoid thinking about: death and debt. Unfortunately, student loan debt is a part of life for many college graduates nowadays, especially for students obtaining advanced or professional degrees. Within the first quarter of this year, the total national student debt was over $1.5 trillion for the first time, at a staggering $1.521 trillion in national student debt.
61% of 2015 college graduates in North Carolina graduated with student loan debt. A 2018 report indicated that Class of 2017 graduates had accumulated $39,400 in student loan debt. However, students are not alone in their debt load. The same report showed that $81.5 billion of the debt is in Parent PLUS loans.
Since the majority of graduates in North Carolina will likely have some amount of student debt during their lifetime, it's only appropriate to ask what happens to your student loan debt when you die?
Below are the different types of loans and what happens to the debt in the event the borrower passes away. Although it may not be a pleasant topic, it is imperative that you consider your debt as you work on your financial and estate plans.
Types of Student Loans:
● Federal student loans.If the debt is a federally backed education loan that the student took on by him or herself, then the loan is automatically canceled when the student dies, and the government discharges the debt. These loans have no co-signer, and the legal terms that govern the loans specify that the debt is canceled upon the death of the student.
● Private student loans. Whether a private student loan is canceled after the borrower’s death depends on the specific lender’s policies and the loan’s legal documents. Check with the lender to find out if they offer any death discharge protection. Some, but not all, private lenders provide this protection to their borrowers.
● Refinanced student loans.When you refinance your student loan debt, the terms of your old loan are replaced by new terms you agree to when you sign the refinancing documents. While there may be some financial benefits to refinancing your student loans, the terms of your new loan and policies of your new lender will now control your loans. You may lose death discharge protection if you had it in your original loan but it is not present in the new ones.
● Parent PLUSloans.When a parent takes out a PLUS loan to help pay for a child’s education, and either the parent (borrower) or the child (student) later dies, the federal government will forgive the debt. However, if the student dies, the borrower may receive a 1099-C form, which treats the wiped-out debt as taxable income. As is the case with all tax issues, you should discuss your situation with a qualified tax advisor.
● Co-signed student loans. If you have a co-signed student loan and the primary borrower passes away, you are still on the hook for the debt. As the co-signer, if you die, the primary borrower may be required to pay the entire balance of the student loan in full. In this event, it is essential that the primary borrower check the lending agreement and discuss the situation with the lender to see what relief, if any may be available.
Seek Professional Advice
If you have student loan debt, make sure to let your estate planning attorney know to make sure your loans are taken into account when preparing your will or trust. Depending on the type of student loan you have, your estate may or may not be burdened with your debt after you pass away. Factoring in your loans when designing your plan helps ensure that your family is completely protected.