March 1, 2019

Student Loans After Death

Read more about Student Loans

Student loans do not always disappear if you die. The type of loan affects what happens next. Read on to learn what to do if a loved one dies while still in debt.

Upon your death, your federal student loans will be discharged. This means the debt is canceled if a family member or other representative provides proof of death to the loan servicer.

Proof of death documentation is needed in order to includes an accurate and complete copy of either:

  1. The Original Death Certificate
  2. A Certified Copy of Death Certificate

Contact your loan servicer for more information about document requirements.

You Should Know:
With Federal Perkins Loans, proof of death should be presented directly to the school. If the school has appointed a loan servicer to handle your account, however, proof of death is submitted to the loan servicer.

Federal Loan Payment Responsibility

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You don't need a cosigner to obtain most federal student loans. But there are other types of student loans that might require one, such as Direct PLUS loans and private loans.

Federal Plus Loans
These are obtained by either the student or parent of the qualifying student. They sometimes require a cosigner. The death discharge differs depending on

  • Who took out the loan
  • Who passed away
  • If there was a cosigner on the loan

Parent Plus Loans
These are federal loans obtained by the parent(s) of a dependent undergraduate student.

  • If the parent who took out the loan or the student for which a federal Parent PLUS loan was obtained dies, the loan will be discharged.

    Proof of death documentation must be submitted for loan discharge.

  • If both parents are responsible for the Parent PLUS loan, and only one parent passes on, the surviving parent is held responsible for repayment of the loan.

Thanks to a tax code change effective January 1, 2018, parents are no longer saddled with taxation after the death discharge of a Parent PLUS loan due to the student's death.

Prior to the induction of this law, parents received a 1099-C form from the IRS and the balance of the canceled loan was treated as taxable income.

This change in tax code expires on December 31, 2025. Parents could once again face a large tax bill.

Direct Plus Loans
Direct PLUS loans are federal loans obtained by the graduate or professional student.

  • If the student who took out the loan dies AND there was no cosigner, the loan will be discharged. Proof of death documentation must be submitted for loan discharge.

  • If the student required a cosigner for their Direct PLUS loans, the cosigner is responsible for repayment of the student loan if the student dies.

Are your student loans private? Keep reading for your student loan death cancellation options.

PRIVATE STUDENT LOAN DEATH DISCHARGE

Private student loans are not required to honor the programs that federal student loans do. While some honor the loan discharge due to death, each private lender can set their own terms.

This means that the contract for your student loan determines what happens to your loan upon your, or your cosigner's, death.

Find lenders that offer death discharge.
Do your homework thoroughly when looking for a lender. Inquire into both student and cosigner death discharge or release options.

Unless you require a cosigner, or if your spouse must sign your loan contract, your debt should not become the responsibility of any other person upon your death. Some lenders discharge the debt even if there is a cosigner on the loan.

Having a cosigner can make a huge difference regarding who, if anyone, is responsible for paying off the student loan following death. Or even if the loan will be automatically be placed into default status.

Read on to find out how the death of a borrower or cosigner affects a cosigned student loan.

COSIGNED LOAN

Some borrowers do not meet the credit requirements for a student loan. In these situations, a cosigner, also called an endorser, will be required.

As co-borrowers, cosigners are responsible for the debt if the borrower defaults on the loan. In the case of student death, a cosigner is still responsible for paying the debt of the student loan unless the terms of the contract state otherwise.

With some loan contracts, the death of the student, or the cosigner, may automatically place the loan in default status. This mean the loan becomes "due in full." This status can arise even if there have been no late or delinquent payments on the loan.

When looking for a loan, avoid options with a default upon death stipulation. Many lenders avoid auto-default terms in student loan contracts because it brings bad publicity to the lender. But it does still occur.

Don't tell your lender that the cosigner has died (unless the loan contract states you must).
Lenders may hire third-party agencies to match up death records to cosigner and borrower lists. If your lender does not follow these practices, they may never know that the cosigner has passed on.

If a loan has gone into default status due to the death of the student or cosigner, your lender may:

  • Ask you to add another cosigner: Unless your contract states so, this is not a requirement.

  • Try to go after the estate of the cosigner: The executor or person responsible for the estate should hire an attorney to protect any assets.

Here are your options:

  • Seek Refinancing
    If you have made regular, on-time payments on the loan, you may qualify for refinancing (more on that below).
    You will need to provide proof that you have personally made the payments to the lender. But if you've made the payments on time, you've established good standing credit and may no longer need a cosigner.

    If you refinance, you may also obtain a lower interest rate or more affordable repayment terms.

  • Attempt to Resolve the Auto-Default Quickly
    Do try to work with the lender that you have. If they are unwilling to refinance your loan, find a lender that will work with you.

    Most lenders write off a student loan after 120 days.

    If you do not resolve the auto-default within this time frame, you may end up dealing with a collection agency or another company, and this will slim down your opportunity for refinance or repayment flexibility.

Want to know if your spouse will have to repay your student loan? Keep reading.

SPOUSE LOAN REPAYMENT RESPONSIBILITY

Federal Student Loans
It is unlikely the spouse will be held responsible for repayment after death except as a cosigner.

Private Loans
A spouse may be responsible. The death clauses vary from lender to lender.

The laws also may vary by state.

In a community property state, loans that are obtained jointly or separately during the marriage often become the responsibility of the spouse after death.

What Are Community Property States?
These are stares where marital property is considered community, or joint, property. These are:

  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

Alaska is an opt-in state for community property—marriage partners are given the option whether to consider debt or assets as community property.

It's important to check the laws of the state where you live for specific information.

Community property laws can even affect unmarried couples. Some states recognize common law marriage, even when a marriage license was never obtained. This means your debts and assets might still be bound to state marital laws.

Most states determine common law marriage by intentions and actions. It is not based on how many years a couple lived together.

Tip: To avoid common law marriage, you must be clear that your intentions are not to marry, and you should seek an attorney to create a legal agreement.

Take a look at the Texas State Common Law Library, Alabama Common Law Marriage, as well as the Common Law Fact Sheet.

Who's responsible for student loan debt if the student dies after a divorce? Read on to find out.

DIVORCE LOAN REPAYMENT RESPONSIBILITY

With divorced couples, the responsibility for student loan debt after death depends on the situation.

  • Was the student loan obtained while married?
  • Is the loan type federal or private?
  • What state do you live in? Is it a community property state?
  • Is the spouse a cosigner?

Depending on the circumstances, the decision will fall into the hands of your lawyer and the court system.

Debt obtained prior to marriage should NEVER be forced on a non-cosigned spouse in a divorce.

Some private lenders try to obtain marital joint assets to pay off student loans taken out prior to marriage. Seek legal assistance if this is happens to you.

ESTATE REPAYMENT RESPONSIBILITY

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Federal student loans must be discharged after death. Your estate and family will not be held liable for debt.

But private student loans are a different matter. These loans are not always discharged after the death of the student, which means your estate might be required to pay them.

You're never too young to start estate planning.
If you have state loans, consider seeing an attorney to create a legal plan that will help close out student loan debt accounts. This will make the process quick and simple for your executor or loved ones.

Stuck with a student loan after the untimely death of a cosigner or loved one? We cover your options below.

REFINANCING A STUDENT LOAN

If you find yourself stuck with a student loan that you either did not obtain (your spouse was the borrower), or your cosigner died, you may be able to refinance the loan.

Private lenders may allow you to lock in or lower the interest rate to make repayment more affordable for you.

Student loan refinance options vary, so you'll want to shop around to find the best offers. The best student loan refinances often have:

  • Lower interest rates: The point is to save money, so you'll want to find a lower rate than what you pay now.

    Interest rates vary because they are based on individual credit and income. Check the rates from several lenders and keep the search within a 14-day window.

    This way it only counts as one credit inquiry on your credit report.

  • Fixed rates: Get rid of the worry over interest rate adjustments by locking in a fixed rate.

    A variable rate might be your best option IF you know you can pay your loan off early.

    Variable rates are often lower than fixed rates. This can save you money over the life of your loan.

    But know that your monthly payment amount might go up if your interest rate increases. If you aren't sure how long you'll need to pay off your debt, stick with a fixed rate.

COMMON REFINANCING QUESTIONS

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What's the difference between refinancing and consolidating?
Refinancing student loans gives you the option to find a better rate and term. Consolidating your federal student loans means lumping multiple loans into one. You pay a weighted average of all interest rates on your loans.

Consolidating doesn't usually save you money. It simply reorganizes your student debts. You can refinance both federal and private loans. But you can only consolidate federal student loans as they are part of a federal program.

Keep in mind that with consolidation, you may enter an income-driven repayment plan that could have up to a 25-year repayment period.

By refinancing, you will lose out on any federal loan benefits that you may have accrued, such as federal loan forgiveness.

What credit score do you need to get approved?
It goes without saying: The higher your score, the better. Each lender has their own requirements. Basically, they don't want late payments, collections, or any type of default on your credit report.

Lenders don't focus solely on your credit score (though it is certainly a factor). They also look at your employment history, savings patterns, and potential for the future too.

How do you prove you can afford the refinance?
The lender will ask you for appropriate documents. Be prepared to show your last few pay stubs and tax returns.

Lenders will look for consistent income and employment over the last year or so. They don't base your approval solely on your income. But it does play a big role.

How do you qualify to refinance?
If you decide to refinance your student loans, there are some steps that you must take to qualify.

The first step is to be prepared to answer questions such as: What loans do you have, what are the interest rates, and are you able to afford a monthly payment?

The second step is to visit one or more of the websites here and fill in your information. At that point, you will receive offers for loan refinancing.

Make sure you read and understand the rates and terms of your offer(s). Finally, accept the terms of your chosen loan refinance offer and get on your way to lower student loan interest rates.

Refinancing not an option? Let's talk about bankruptcy discharge options.

BANKRUPTCY DISCHARGE

In rare cases, you may have your student loan discharged if a bankruptcy court determines that repayment would impose undue hardship on you and your dependents.

You must declare Chapter 7 or Chapter 13 bankruptcy, and the hardship must be decided through proceedings in bankruptcy court.

Read here to learn more about student loan bankruptcy discharge. You may also want to meet with a bankruptcy attorney.

LOAN DISCHARGE OPTIONS

Options are available for getting federal loans discharged due to a catastrophic event. These may include:

Closed School
If the student went to a school, either in the United States or overseas, that then closed, the loans may be eligible for discharge.

Disability
If a student becomes disabled and is no longer able to perform the duties for which they received the federal student aid, they may be eligible for a discharge.

Read here to learn more about how to get your loans discharged due to total and permanent disability.

False Certification of Student Eligibility
Direct or federal loans may be eligible for discharge if criteria surrounding false certifications, signatures, or authorization by your school are met.
Read here to learn more about false certification of student eligibility or unauthorized signature/unauthorized payment discharge.

Unpaid Refund Discharge
The school may be required to return a portion of the loan money if the student withdrew from school after receiving a student loan.

Check with the school to find out how federal refund policies apply to federal aid at the school. Also, contact the loan servicer for additional information.

TIP: If you believe you are eligible for any type of student loan discharge, contact your lender to discuss your options and qualifications.

HOW TO TAKE CARE OF YOUR LOVED ONES

The best way to ensure your student loans are paid off upon death is life insurance. For a young healthy person, life insurance is inexpensive.

A 20-year term policy may cost as little as $25.00 a month and could pay upwards of $300,000 upon death.

Life insurance can pay off student loan debt, and any remaining monetary benefits give your loved ones the gift of financial peace of mind.

To tighten up your financial death benefit package, consider blending your life insurance policy into estate planning. Contact an attorney to get started.

BOTTOM LINE

Upon your death, your federal student loans will be discharged. But the rules not as simple for Parent PLUS loans, Direct PLUS loans or private loans. Follow our guide to take the appropriate action.

Remember: Work with your lender as soon as possible. Most lenders write off a student loan after 120 days.

If you do not resolve any issues that you have within this time frame, you may end up dealing with a collection agency or another company. This may slim down your opportunity for refinance or repayment flexibility.

More from CreditDonkey:


How Much Do I Owe in Student Loans?


Private Student Loan Forgiveness


Student Loan Forgiveness

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